Communicating QuantitativeCommunicating Quantitative Reports with Non-quant Board Members--- My ExperienceMy Experience

Date: 07/19/2011Date: 07/19/2011By: Kehhsiao Lin

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My personal experience is on the riskMy personal experience is on the risk My personal experience is on the risk My personal experience is on the risk management front, where quantitative methods management front, where quantitative methods are applied hea il j st as in act arare applied hea il j st as in act arare applied heavily just as in actuary.are applied heavily just as in actuary.

The similarity of the risk manager and the The similarity of the risk manager and the y gy gactuarial practitioner is so high that I believe actuarial practitioner is so high that I believe you guys provide the similar headache to theyou guys provide the similar headache to theyou guys provide the similar headache to the you guys provide the similar headache to the corresponding board members.corresponding board members.S hi i i hS hi i i h So this presentation might you.So this presentation might you.

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A. Facts in the Board Room

a. The Barrier of Communicating with Non quant Board Members on RiskNon-quant Board Members on Risk Management

1. They don’t admit that they don’t understandth t i l ll t l t i blithe materials very well, at least in public.

2 They hate acronyms especially English2. They hate acronyms, especially English ones. (And RM like English acronyms!)(So do you!)(So do you!)

3. They tend to forget what have been approvedapproved.

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4. If they ask questions, mostly they are askingthe definition of some terms that you believethe definition of some terms that you believeyou have explained many times.

5. Generally speaking, they don’t really know thepriority of risk managementpriority of risk management.

Regardless of all these they have to makeRegardless of all these, they have to makedecision!

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b F Mi k h Qb. Frequent Mistakes that Quant People Made

1. They love English Acronyms.

2. They tend to use a more complicated concept to explain an already complex terminology.

3. They use math to explain, not intuition.

4. They don’t believe that board members cannot understand simple stuffs and theycannot understand simple stuffs, and they show it.

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5. Risk managers tend to elaborate the details,gforgetting to describe the big picture.

6. Risk managers tend to believe that to set thepriority is the responsibility of the board, notp y p y ,the risk management unit, forgetting that theboard needs the input from the RMU.p

7. Sometimes, technical persons know the tech., pvery well, but don’t know the spirits of it.

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C. The Danger of Miscommunication

1.The board doesn’t really know the situation ofthe company in terms of risk exposurethe company in terms of risk exposure.

2 The board has to appro e something it doesn’t2. The board has to approve something it doesn’t quite understand.

3. The board could disapprove something neededt b dto be approved.

4 A thi b d h th b d f l h t d4. Anything bad happens, the board feels cheated.

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B Eff t W M d t IB. Efforts We Made to Improvethe Communicationthe Communication

a Correcting the Basic Mistakesa. Correcting the Basic Mistakes

b Making the Purpose of Reportsb. Making the Purpose of Reports Clear

c. Building Mutual Trust and UnderstandingUnderstanding

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C. Correcting Basic Mistakes

a. Always starting from the whole picture,a ays sta t g o t e o e p ctu e,

but also keeping it simple.

D ’t t t ithDon’t start with:

These are slightly better:

(But a simple start is even better.)

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b. Never too many remindingb. Never too many reminding

1. Remember that the board members touch

these materials only once a week, at best.

2. Start any term with full Chinese AND

English before shorten it to acronym AndEnglish, before shorten it to acronym. And

don’t hesitate to repeat the full Chinese or

English name in the course of presenting.

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c. Top-down, Big-small Approach

1. Every time, start from the top. Telling the board what kind of risk we are talking aboutboard what kind of risk we are talking aboutis always right.

2. From top-down map, we start from the majorrisk chunk Explain why we would jump overrisk chunk. Explain why we would jump oversome minor parts.

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d. Linking to Business

1.At the end, risk management is part of business we have to come back to thisbusiness, we have to come back to thisbase. Risk managers need to know b siness toobusiness too.

2 Th ff i id f i k t2. The offensive side of risk managementhas to be explained well, as important ast it d f i id (S tito its defensive side. (Sometimes, youhave to courageously say the bank’s NPLi t l )is too low.)

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D. Making the Purpose of Reports ClearClear

My favor order of the risk management reports are as followsreports are as follows.

1. Urgent Event first2 Routine Reports with focuses2. Routine Reports with focuses3. Regulatory Change and Impact4. Educational courses

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a.Urgent Event Firsta.Urgent Event First

Telling the board that the bank doesn’t have largeTelling the board that the bank doesn t have large exposure to Greece when the Greek is in troubleis very comforting Do it asapis very comforting. Do it asap.

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b. Routine Reports with Focuses

A “routine” report will consist:A routine report will consist:1. Basic numbers to show overall picture.

(Such as VAR )(Such as VAR.)2. A newly completed measure of some

kind of risk We will continuingly addkind of risk. We will continuingly addnewer, better and more accurate methodsto measure important risksto measure important risks.

3. Follow-up the decision made in theprevious meetingsprevious meetings.

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b. Routine Reports with Focuses (cont’d)

1.Always remind the board the whole picture, d th th band then the numbers.

2. When introducing a new result of risk measure,tell the board this is a newly completed system,and it is just a updating, not a warning.

3. Unless time and the atmosphere are right, I willnot go over how I got the new numbers. Trustme, the board members don’t care. If they care,you must have bad records.

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c. Regulatory Change and Impact

The best example is Basel II and Basel III.T ll th b d th thiTell the board three things:

1. What’s old and what’s new.2. The impact to the company.3. How the management team is going

to deal with it.

Tell them the BIG things, never jump into thedetails.

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d. Educational Courses

1. I will do this only the board ask, or2 the coming impact is too major and we2. the coming impact is too major, and we

really need the board to understand it.(Probably only Basel stuffs and CDO/CDS(Probably only Basel stuffs and CDO/CDSqualify this criterion.)

3 Again few maths more intuition Therefore3. Again, few maths, more intuition. Therefore,the presenter has to be really knowledgeable.

4 The most difficult part is to introduce a new4. The most difficult part is to introduce a newmethod that will cost a lot in building a system.You might need to convince the board that it isYou might need to convince the board that it isimportant and complicated.

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E. Building Mutual Trust

a. Attitude

Let the board know you are serious, moreserious than the board itself about riskserious than the board itself, about riskmanagement.(This is the best part of our risk managers(This is the best part of our risk managers.Our board knows they are serious and knowledgeable in their business )knowledgeable in their business.)

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b. In Addition to Attitude: The Real C f Ri k M tCourse of Risk Management

1 We clearly show the board how the decisions1. We clearly show the board how the decisionsit made are enforced in relevant control points.(Thi i i t t th b d b(This is very important, the board memberslike to know what is their power.)

2. Show the board many sheets that are used byi k Th b d d t lik trisk managers. The board does not like to see

them, but would be comfortable to see someonei th t t l i kare using them to control risks.

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F. Concluding Remarks

Very few board members can readVery few board members can read the risk management numbers and understand them all Professionalsunderstand them all. Professionals have to lead them in an honest way, and let them make decisions comfortablycomfortably.

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Th k f li t iThank you for listening

AndAnd

Q & who knows

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風險管理路徑圖 覧

Risk Governance

風險管理路徑圖一覧

Enterprise Risk Management –Economic Capital & Risk-Adjusted Returns

Risk Governance

Market Risk EC Credit Risk EC Op Risk EC Liquidity Risk

Basel II Capital Basel II Capital Basel II Basel II/

Risk Measurement

Basel II Capital

Pillar 1 IMA Pillar 2 ICAAP Pillar 1 IRB Pillar 2 ICAAP

↑

Basel II Capital

Risk Measurement Pillar 1 AMA

Basel IICapital

Basel II/Pillar 2 Cap.

Risk

TradingBook

BankingBook Risk Measure.

↑

Portfolio Obligor &Facility

Pillar 1 SA

Stress Test

Measurement

VaR

Greeks, MV…

Correlations

Concentration NII-at-Risk

EVE… PD

LGD

Statistical

Simulation

Liquidity Indicators

Ri kStress Test

Risk Control & Reporting Risk Control & Reporting

Stress TestStress Test EAD/CCR Risk Control& Reporting

Risk Control &Reporting

Data Mart & BancWareData Mart & BancWare Basel II Data MartsBasel II Data Marts OP Risk PlatformOP Risk Platform BancWareBancWare23

利率風險管理路徑圖 – 銀行簿

Banking Book (由財管處管理)

Market Risk

Interest Rate Risk Measurement

Basel II Capital Requirement

Risk Control & Reporting

Banking Book (由財管處管理)

VaR/Economic Capital Pillar 2 - (ICAAP) Risk Guidelines

Stress Testing Enhance IR Risk Guideline Management Oversight

Limit Setting & MonitoringEVENII-at-Risk

Dynamic IR Risk Measures Enhance Investment Guideline

NII-at-Risk

Stress Testing

Independent Monitoring互

NII01 NII t Ri k

EVE LimitsStatic IR Risk Measures

NII-at-Risk Limit

EVE)

EVE

Forecast Prepay. Model

Repricing Gap Analysis

Independent Monitoring 補

Repricing Gap

NII01, NII-at-Risk

Standard ALM Reports

Repricing Gap LimitsEVE

Non-maturity Deposits

Day-to-Day Management

Management Info System FTP

EVE D i d S i

ALM System – BancWare – to Support

System Setup Documentation

Non maturity Deposits EVE: Dynamic and Static

NII-at-Risk: Dynamic

y pp

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台新銀總行台新銀總行 ---- TWDTWD利率重定價缺口部位利率重定價缺口部位 (2)(2)台新銀總行台新銀總行 ---- TWDTWD利率重定價缺口部位利率重定價缺口部位 (2)(2)幣別：TWD, 單位：Million

<=1M >1M~2M >2M~3M >3M~1Y >1Y~2Y >2Y~3Y >3Y~5Y >5Y~10Y >10Y TotalRSA and RSL Item

Home Money 10,679 32,248 14 141 4 4 5 156 1 43,251Trading 51,730 0 0 0 0 0 0 0 0 51,730一順位 31,206 171,036 0 14 4 1 11 107 342 202,719二順位 1 26 1 32 120 230 645 2,422 68 3,545中小企業放款 72 1,924 1 3 93 13 20 15 21 2,161中 業放款 , ,企業放款 74,749 29,884 21,141 10,309 1,839 2,934 92 0 1 140,950存單質借 27 7 8 56 3 1 0 0 0 103汽貸 20 50 41 957 2,888 3,719 5,536 128 1 13,339信用卡 954 999 988 7,823 2,103 2,085 1,752 527 17 17,249信貸 72 9,536 28 322 401 1,125 2,011 3,409 1,705 18,608採購卡 0 2 1 17 0 0 0 0 0 20

RiskSensitive

Assets

採購卡

現金卡 590 610 611 3,494 139 888 1,192 3,317 1,958 12,799票券 59,100 14,700 15,800 34,200 0 0 0 0 0 123,800債券 500 502 313 380 969 4,716 4,575 50 0 12,005應收帳款 325 183 82 91 0 0 0 0 0 681

Total 230,024 261,706 39,028 57,839 8,561 15,717 15,839 10,131 4,114 642,960RP-債券 6 099 943 0 46 0 0 0 0 0 7 088RP-債券 6,099 943 0 46 0 0 0 0 0 7,088Trading 59,053 0 0 0 0 0 0 0 0 59,053定存 82,869 180,606 20,676 100,960 2,463 229 0 0 0 387,803拆入 5,050 0 0 0 0 0 0 0 0 5,050活期 51,387 48,396 4,499 39,623 51,960 0 0 0 0 195,864結構性存款 223 53 362 15 225 0 0 0 0 878金融債 5 800 0 0 7 008 0 0 0 12 192 0 25 000

RiskSensitiveLiabilities

金融債 5,800 0 0 7,008 0 0 0 12,192 0 25,000

Total 210,481 229,998 25,537 147,652 54,647 229 0 12,192 0 680,736

Net 16,788 -1,096 16,180 -12,283 6,700 -1,714 -7,300 0 0 17,276

1. Interval Gap(RSA -RSL)

36,332 30,613 29,671 -102,096 -39,386 13,775 8,539 -2,061 4,114 -20,500

2. Cumulative36 332 66 945 96 616 5 480 44 866 31 092 22 553 24 614 20 500

Derivatives

設定Gap36,332 66,945 96,616 -5,480 -44,866 -31,092 -22,553 -24,614 -20,500

3. RSA / RSL 1.15 1.14 1.18 0.99 0.94 0.96 0.97 0.97 0.974. CumulativeGap / TotalEarningAssets

4.8% 8.8% 12.7% -0.7% -5.9% -4.1% -3.0% -3.2% -2.7%

GapMeasures

設定限額控管

Assets

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台新銀總行台新銀總行 淨利息收入風險值淨利息收入風險值 (NII(NII Ri k)Ri k)靜態分析靜態分析 (2)(2)幣別：TWD 單位：Million unless otherwise specified

Next Total Assets Total Liabilities Matched PositionNII01

Open RSA Open RSL Revaluation Total NII

台新銀總行台新銀總行 ---- 淨利息收入風險值淨利息收入風險值 (NII(NII--atat--Risk)Risk)靜態分析靜態分析 (2)(2)

CumulativePosition

WeightedAVG Rate

(%)

CumulativePosition

WeightedAVG Rate

(%)

CumulativePosition

Lock-inMargin

(%)

Lock-in NII ($)(in '000)

(a)

CumulativePosition

WeightedAVG Rate

(%)

CumulativePosition

WeightedAVG Rate

(%)

Reval.Rate(%)

Unreal'd NII(in '000)

(b)

2010/05/05 761,031 0.89 781,531 0.80 761,031 0.08 1,752 0 0.89 20,500 0.80 1.31 284 2,036 6

2010/05/06 694 185 0 95 716 059 0 86 694 185 0 09 1 741 0 0 95 21 874 0 86 1 31 270 2 011 6

RepricingDate

NII01(in '000)

(in '000)(a)+(b)

2010/05/06 694,185 0.95 716,059 0.86 694,185 0.09 1,741 0 0.95 21,874 0.86 1.31 270 2,011 62010/05/07 683,597 0.96 712,394 0.86 683,597 0.10 5,594 0 0.96 28,797 0.86 1.31 1,064 6,657 242010/05/31 508,385 1.07 567,442 0.94 508,385 0.13 1,808 0 1.07 59,057 0.94 1.38 722 2,530 16May 2010 508,385 1.07 567,442 0.94 508,385 0.13 49,436 0 1.07 59,057 0.94 1.38 11,833 61,269 258Jun 2010 219,742 1.13 310,528 1.01 219,742 0.12 40,918 0 1.13 90,787 1.01 1.53 25,400 66,318 562J l 2010 139 383 1 47 255 969 1 14 139 383 0 34 30 587 0 1 47 116 586 1 14 1 55 42 465 73 052 884Jul 2010 139,383 1.47 255,969 1.14 139,383 0.34 30,587 0 1.47 116,586 1.14 1.55 42,465 73,052 884Dec 2010 80,187 1.95 156,965 1.35 80,187 0.60 42,250 0 1.95 76,778 1.35 1.64 21,237 63,487 698

Total 2010 80,187 1.95 156,965 1.35 80,187 0.60 334,040 0 1.95 76,778 1.35 1.64 229,202 563,241 5,915

481,096 276,154 757,251 7,518

Total 2011 59 580 1 95 50 297 1 83 50 297 0 11 289 596 9 282 1 95 0 1 83 1 97 57 894 347 490 1 941

Total for Next 12 Mths

Total 2011 59,580 1.95 50,297 1.83 50,297 0.11 289,596 9,282 1.95 0 1.83 1.97 57,894 347,490 1,941Total 2012 47,934 1.98 31,466 2.35 31,466 -0.37 -92,146 16,469 1.98 0 2.35 2.02 -4,398 -96,544 -2,017Total 2013 23,978 1.95 19,992 2.29 19,992 -0.33 -97,501 3,986 1.95 0 2.29 2.18 -15,685 -113,187 -1,086Total 2014 16,956 2.17 16,192 2.47 16,192 -0.29 -55,320 764 2.17 0 2.47 2.29 -3,946 -59,267 -254Total 2015 12,415 2.21 12,192 2.68 12,192 -0.47 -51,976 223 2.21 0 2.68 2.38 -1,596 -53,573 -70Total 2016 9 051 2 24 12 192 2 68 9 051 0 44 48 193 0 2 24 3 141 2 68 2 26 6 275 54 469 147Total 2016 9,051 2.24 12,192 2.68 9,051 -0.44 -48,193 0 2.24 3,141 2.68 2.26 -6,275 -54,469 147Total 2017 7,665 2.25 0 0.00 0 2.25 -13,928 7,665 2.25 0 0.00 2.51 -16,098 -30,026 -403Total 2018 6,222 2.18 0 0.00 0 2.18 0 6,222 2.18 0 0.00 2.55 -21,409 -21,409 -704Total 2019 4,605 2.30 0 0.00 0 2.30 0 4,605 2.30 0 0.00 2.59 -18,004 -18,004 -537Total 2020 3,351 2.29 0 0.00 0 2.29 0 3,351 2.29 0 0.00 2.63 -11,681 -11,681 -397T t l 2021 2 423 2 21 0 0 00 0 2 21 0 2 423 2 21 0 0 00 2 67 11 857 11 857 279Total 2021 2,423 2.21 0 0.00 0 2.21 0 2,423 2.21 0 0.00 2.67 -11,857 -11,857 -279Total 2022 1,956 2.20 0 0.00 0 2.20 0 1,956 2.20 0 0.00 2.69 -10,240 -10,240 -215Total 2023 1,262 2.06 0 0.00 0 2.06 0 1,262 2.06 0 0.00 2.72 -9,130 -9,130 -168Total 2032 2 2.73 0 0.00 0 2.73 0 2 2.73 0 0.00 3.11 -6 -6 -0

Total 0 0.00 0 0.00 0 0.00 264,570 0 0.00 0 0.00 0.00 150,841 415,411 1,772, , , ,

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Risk ARisk A

Risk A1 Risk A2 Risk A3Risk A3

Risk A3.1 Risk A3.2 Risk A3.3

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Risk Map Business Value

Report

Risk Map Business Value

Report

Measurement Stress Test

DataIntegration

Model/Company

Th l

cost

Integration Theory layer(Approach)

Raw Data

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