Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference...
-
Upload
nafcu-services-corporation -
Category
Business
-
view
420 -
download
1
description
Transcript of Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference...
National Association of Federal Credit Unions l www.nafcu.org
Enterprise Risk
Management: Balancing
Threats and Profitability
Presented by
Radu Miclaus
SAS Institute, Inc.
National Association of Federal Credit Unions l www.nafcu.org
“amat victoria curam”
Victory likes careful preparation. (Anonymous)
National Association of Federal Credit Unions l www.nafcu.org 1980s
Credit
Interest Rate
Financial
Risk Management
1990s
Credit
Transactional
Enterprise
Risk Management
Credit
1970s
Credit
Risk Management
Compliance
Op
eratin
g
Liquidity
Ma
rket
Interest Rate
Liquidity
Ma
rket
Strategic
Reputation
Evolution of Industry Best Practices in ERM
National Association of Federal Credit Unions l www.nafcu.org
Real Measures, Real Dollars
• Reduce Charge-Offs: 1%↑ earnings
• Risk-based Pricing: 1 to 2%↑ earnings
• Streamlined Underwriting Processes: 0.5 to
1%↑ in earnings
• Mitigating Operational Losses: 1 to 2%↑ in
earnings
National Association of Federal Credit Unions l www.nafcu.org
Regulatory Incentives
• Identifies and measures all material risks
• Relates capital to risk levels (cushion)
• States capital adequacy goals to risk (Management)
• Assesses conformity to our stated risk objectives (Board involvement)
National Association of Federal Credit Unions l www.nafcu.org
ERM Reflects the Paradigm Shift
• Fragmented
• Ad hoc
• Narrowly focused
• Integrated
• Continuous
• Broadly focused
Old Paradigm New Paradigm
Key: Level of Sophistication
National Association of Federal Credit Unions l www.nafcu.org
Sophisticated Competitors Create
Competitive Inequality
• “Right” price all members
– Lower pricing on least risky/profitable members
– Higher pricing on most risky members
• Better pricing/servicing to their best members…
• …and to yours
National Association of Federal Credit Unions l www.nafcu.org
Regulatory versus Economic Capital
•Role of capital
– Institutions should have sufficient capital to protect themselves and their depositors from the risks (credit/market/operational) they are taking.
•Regulatory capital
– Amount of capital an institution should have according to a regulation (for example, Basel I or Basel II)
•Economic capital
– Amount of capital a bank has based on internal modeling strategy and policy
•Types of capital:
• Tier 1: common stock, preferred stock, retained earnings
• Tier 2: revaluation reserves, undisclosed reserves, general provisions, subordinated debt (can vary from country to country)
• Tier 3: specific to market risk
National Association of Federal Credit Unions l www.nafcu.org
Benefits of Sophistication
• Regulators: Better, Improved CAMEL
ratings
• Ratings Agencies: Cost/Availability of
Funds
• Insurance Companies: Insurance
Premiums and Coverage
(We are judged by our Oversight and Controls)
National Association of Federal Credit Unions l www.nafcu.org
How Do We Get that Level of
Sophistication?
• Borrow Industry Best Practices
– People
– Technology
– Processes
• Get Public Information
10
National Association of Federal Credit Unions l www.nafcu.org 1980s
Credit
Interest Rate
Financial
Risk Management
1990s
Credit
Transactional
Enterprise
Risk Management
Credit
1970s
Credit
Risk Management
Compliance
Op
eratin
g
Liquidity
Ma
rket
Interest Rate
Liquidity
Ma
rket
Strategic
Reputation
Evolution of Industry Best Practices
National Association of Federal Credit Unions l www.nafcu.org
Credit
People
• Business Analysts
• Underwriting Background
• Statistical Background (novice-expert)
Technology
• Predictive Modeling
• Simulation (VaR)
• Reporting (multidimensional)
Processes
• Account level risk profiling (credit rating system)
• Loan portfolio level outcome simulation
• Stress Testing
• Healthy Capital Structure
National Association of Federal Credit Unions l www.nafcu.org
Credit Risk Analytics (Example)
Credit Unit A is aiming to reduce bad credit charge-offs,
and improve the process of reserving and capital
structure.
Acc
ou
nt
• PD, LGD, EAD (Data Mining)
• Credit Scorecards
• Credit Rating (IRB)
Port
folio
• Stress Testing (application and
macroeconomic factors)
• Exposure Simulation (50-th
percentile vs. 99-th percentile)
• Define Policy and Thresholds
National Association of Federal Credit Unions l www.nafcu.org
Market
People
• Business Analysts
• Investment Background
• Statistical Background (novice-expert)
Technology
• Forecasting
• Simulation (VaR)
• Performance Reporting (multidimensional)
Processes
• Performance Monitoring
• Asset allocation based on risk profile
• Stress Testing
• Healthy Capital Structure
National Association of Federal Credit Unions l www.nafcu.org
Market Risk Analytics (Example)
Credit Unit A is aiming to improve portfolio
performance through investment policy in order to
better meet profit goals and buffer capital structure
Inst
rum
ent
• Instrument/Position Level
Exposure Calculation (MTM)
• Pricing functions
• P/L curve/ Surfaces
• Performance Monitoring
Port
folio
• Stress Testing (based on risk
factors- pricing and macro)
• Exposure Simulation (50-th
percentile vs. 99-th percentile)
• Define Investment Policy and
Thresholds
National Association of Federal Credit Unions l www.nafcu.org
Operational
People
• Business Analysts/ Risk Managers
• Business Unit experience
Technology
• Integrated data collection and process management
• Performance Reporting (multidimensional)
• Simulation (VaR)
Processes
• Centralized Approach
• Awareness and Mitigation Action
• Outcome Simulation
• Healthy Capital Structure
National Association of Federal Credit Unions l www.nafcu.org
Operational Risk/ EGRC (Example)
Credit Unit A is aiming to improve the operational environment
through increased awareness of risk pockets and better actions
plans for mitigation and planning
Bu
sin
ess
Un
it
Cap
ital
• Event Modeling at BU level
• Exposure aggregation by BU
and Risk Type
• Capital Allocation
• Centralized data
collection/reporting
• Centralized/Streamline
process management
• Ownership and
Awareness
National Association of Federal Credit Unions l www.nafcu.org
Not an Initiative or a Culture Change
• It’s a New Way of Life
• It’s a Shift in Thought (not in culture):
Everyone is a risk manager, not just the
CRO
• Nurture the entrepreneurial spirit and take
calculated risks
• It’s both Art and Science
Business Acumen
Analytics
Goal Achievement
National Association of Federal Credit Unions l www.nafcu.org
Art and Science
“This, ultimately, is what risk management
and decision-making are all about and where
the balance between measurement and gut
becomes the focal point of the whole story.”
--Peter L. Bernstein
Against the Gods:
The Remarkable Story of Risk
National Association of Federal Credit Unions l www.nafcu.org
NCUA’s Risk Categories and Risk Indicators
CREDIT RISK FACTORS:
Low Medium High
Board and Operational Management Understanding
Fully understands all aspects…
Reasonably understands key aspects…
Does not understand risks…
Etc.
INTEREST RATE RISK FACTORS:
Low Medium High
Board and Operational Management Understanding
Fully understands all aspects…
Reasonably understands key aspects…
Does not understand risks…
Etc.
Art or Science?
From NCUA Letter No.: 02-FCU-09
National Association of Federal Credit Unions l www.nafcu.org
Final Thought….
Analytics
Business Acumen
Goal Achievement
• Awareness • Expectations
• Decisions • Executions
National Association of Federal Credit Unions l www.nafcu.org
Any Questions?
(919) 780-8193