Developing: Risk In Banks
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DEVELOPING RISK MANAGEMENT IN BANKS BY AZIZ UR RAHMAN Presented by: Faisal Kamran Date: March 2nd , 2009.
10/09/09
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2
WHY I CHOOSE THIS TOPIC: • Banks are profit earning institutions, they face problems as well in borrowing and lending, when banks are exposed to various risks in doing business and failure to adequately manage these risks exposes banks not only to losses, but may also threaten their survival thereby endangering the stability of the financial system. Hence , as an MBA student we should learn how to manage the developed risks. The risks may include credit, market, liquidity, and operational. 2/27/2009 10/09/09
copyright 2006 www.brainybetty.com; All Rights Reserved. Free template from www.brainybetty.com
31
THEME: • The main idea of this article is that the presence of element of risk is always their in any business so as the case of bank as well. What we need to do is how effectively and efficiently minimize these in the best interest of the business. A sound risk management structure makes the banks to run smoothly and in progress. Banks participates in developing economy of every country 10/09/09
Free template from www.brainybetty.com
4
SUMMARY In the past 50 years Pakistan’s banking sector has shown a tremendous growth and banking of Pakistan are going ahead in this respect. And strong as compared to other countries of the world .In this article the author AZIZ UR RAHMAN is sharing his views about the risks developing and the management of those risks in banking network. The key elements of risk management process should include 1. Risk management structure with board and senior management oversight as an integral element. 2. System and procedure for risk identification, measurement, monitoring and control. 3. Risk management framework review mechanism.
10/09/09
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5
RISK MANAGEMENT STRUCTURE:
1
10/09/09
A sound risk management structure is important to ensure that the bank’s overall risk exposures are within the parameters set by the board. Such structure should be in accordance with the size of bank, complexity, and diversity of its activities. 2. The risk management structure should facilitate effective board and senior management oversight and proper execution of risk management and control processes. At he minimum, the structure should contain the following:
Free template from www.brainybetty.com
www.brainybetty.com
6
(( (a) BOARD AND SENIOR MANAGEMENT OVERSIGHT:
The board should be responsible for establishing the bank’s strategy and significant policies relating to management of individual risk elements to which it is exposed. The board responsibilities should include: Defining the bank’s overall strategic direction and tolerance level for each element. Ensuring that the bank maintains the various risks facing it at prudent levels. Ensuring that senior management as well as individuals responsible for managing individual risks facing the bank possesses sound expertise and knowledge to accomplish the risk management function. Ensuring that the bank implements sound fundamental principles that facilitate the identification, measurement, monitoring and control of all risks facing it. Ensuring that appropriate plans and procedures for managing individual risk elements are in place.
10/09/09
Free template from www.brainybetty.com
7
(b) BOARD RISK MANAGEMENT COMMITTEE: A Board Risk Management Committee should be in place, which should be responsible for ensuring adherence to the bank’s risk management policy and procedure as set by the board
10/09/09
Free template from www.brainybetty.com
8
(c) SENIOR MANAGEMENT:
Senior management is responsible for the implementation of risk policies and procedures keeping in view the strategic direction and risk appetite specified by board. Senior management is responsible for: The development and implementation of procedures and practices that translate the board’s goals, objectives, and risk tolerances into operating standards that are well understood by bank personnel. Establishing lines of authority and responsibility for managing individual risk elements in line with the board’s overall direction. Risk identification, measurement, monitoring and control procedures Establishing effective internal controls over each risk management process. Ensuring that the bank’s risk management processes are properly documented. And staffs are aware of risks.
10/09/09
Free template from www.brainybetty.com
9
RISK MANAGEMENT COMMITTEE A risk management committee to be headed by a board Member in charge of Risk Management should be responsible for the review of the bank’s risk management framework, identification of lapses and suggestion of corrective measures. Through the examination of balance sheet structure, portfolio limits and distribution, target market / products, using macro economic data, environment assessment and in house statistics. The Committee should have reporting relationship to the Board Risk Management Committee. Members of the Committee should, at minimum, comprise the heads of department in risk management division, heads of operations department as well as heads of human resources and legal departments.
10/09/09
Free template from www.brainybetty.com
10
RISK MANAGEMENT DIVISION:
10/09/09
A risk management division headed by an executive vice president, which should comprise the risk management and other relevant departments should be established.
Free template from www.brainybetty.com
11
RISK MANAGEMENT DEPARTMENT •
10/09/09
:
A Risk Management Department with functional arrangements to ensure effective management of credit, market, operational and liquidity risk. For each of the risks, the arrangements should cover the following areas, among others: Establishment of systems and procedures relating to risk identification, measurement and control and monitoring of loan and investment portfolio quality and early warning. Ensuring that risk remains within the boundaries established by the Board. Ensuring that the business line comply with risk parameters and prudential limits established by the Board. Remedial measures to address identified deficiencies and problems. Stress testing of credit portfolio, also in relation to environmental deficiencies and problems. Risk reporting Free template from www.brainybetty.com
12
Conclusion:
10/09/09
The starting of this article was the observation that banks are [ by their very nature ] in risk business and that they conduct risk management as an empirical fact ; the combination of these factors constitutes a positive theory for risk management in banks. However the central role of risk in banking business is merely a necessary condition for the management of risks. We know that value maximization is the ultimate goal of banks, documentation and adequate awareness about the risk in generality of staff is necessary so as to make risk management a part of corporate culture of bank. Free template from www.brainybetty.com
13
10/09/09
Free template from www.brainybetty.com
2
WHY I CHOOSE THIS TOPIC: • Banks are profit earning institutions, they face problems as well in borrowing and lending, when banks are exposed to various risks in doing business and failure to adequately manage these risks exposes banks not only to losses, but may also threaten their survival thereby endangering the stability of the financial system. Hence , as an MBA student we should learn how to manage the developed risks. The risks may include credit, market, liquidity, and operational. 2/27/2009 10/09/09
copyright 2006 www.brainybetty.com; All Rights Reserved. Free template from www.brainybetty.com
31
THEME: • The main idea of this article is that the presence of element of risk is always their in any business so as the case of bank as well. What we need to do is how effectively and efficiently minimize these in the best interest of the business. A sound risk management structure makes the banks to run smoothly and in progress. Banks participates in developing economy of every country 10/09/09
Free template from www.brainybetty.com
4
SUMMARY In the past 50 years Pakistan’s banking sector has shown a tremendous growth and banking of Pakistan are going ahead in this respect. And strong as compared to other countries of the world .In this article the author AZIZ UR RAHMAN is sharing his views about the risks developing and the management of those risks in banking network. The key elements of risk management process should include 1. Risk management structure with board and senior management oversight as an integral element. 2. System and procedure for risk identification, measurement, monitoring and control. 3. Risk management framework review mechanism.
10/09/09
Free template from www.brainybetty.com
5
RISK MANAGEMENT STRUCTURE:
1
10/09/09
A sound risk management structure is important to ensure that the bank’s overall risk exposures are within the parameters set by the board. Such structure should be in accordance with the size of bank, complexity, and diversity of its activities. 2. The risk management structure should facilitate effective board and senior management oversight and proper execution of risk management and control processes. At he minimum, the structure should contain the following:
Free template from www.brainybetty.com
www.brainybetty.com
6
(( (a) BOARD AND SENIOR MANAGEMENT OVERSIGHT:
The board should be responsible for establishing the bank’s strategy and significant policies relating to management of individual risk elements to which it is exposed. The board responsibilities should include: Defining the bank’s overall strategic direction and tolerance level for each element. Ensuring that the bank maintains the various risks facing it at prudent levels. Ensuring that senior management as well as individuals responsible for managing individual risks facing the bank possesses sound expertise and knowledge to accomplish the risk management function. Ensuring that the bank implements sound fundamental principles that facilitate the identification, measurement, monitoring and control of all risks facing it. Ensuring that appropriate plans and procedures for managing individual risk elements are in place.
10/09/09
Free template from www.brainybetty.com
7
(b) BOARD RISK MANAGEMENT COMMITTEE: A Board Risk Management Committee should be in place, which should be responsible for ensuring adherence to the bank’s risk management policy and procedure as set by the board
10/09/09
Free template from www.brainybetty.com
8
(c) SENIOR MANAGEMENT:
Senior management is responsible for the implementation of risk policies and procedures keeping in view the strategic direction and risk appetite specified by board. Senior management is responsible for: The development and implementation of procedures and practices that translate the board’s goals, objectives, and risk tolerances into operating standards that are well understood by bank personnel. Establishing lines of authority and responsibility for managing individual risk elements in line with the board’s overall direction. Risk identification, measurement, monitoring and control procedures Establishing effective internal controls over each risk management process. Ensuring that the bank’s risk management processes are properly documented. And staffs are aware of risks.
10/09/09
Free template from www.brainybetty.com
9
RISK MANAGEMENT COMMITTEE A risk management committee to be headed by a board Member in charge of Risk Management should be responsible for the review of the bank’s risk management framework, identification of lapses and suggestion of corrective measures. Through the examination of balance sheet structure, portfolio limits and distribution, target market / products, using macro economic data, environment assessment and in house statistics. The Committee should have reporting relationship to the Board Risk Management Committee. Members of the Committee should, at minimum, comprise the heads of department in risk management division, heads of operations department as well as heads of human resources and legal departments.
10/09/09
Free template from www.brainybetty.com
10
RISK MANAGEMENT DIVISION:
10/09/09
A risk management division headed by an executive vice president, which should comprise the risk management and other relevant departments should be established.
Free template from www.brainybetty.com
11
RISK MANAGEMENT DEPARTMENT •
10/09/09
:
A Risk Management Department with functional arrangements to ensure effective management of credit, market, operational and liquidity risk. For each of the risks, the arrangements should cover the following areas, among others: Establishment of systems and procedures relating to risk identification, measurement and control and monitoring of loan and investment portfolio quality and early warning. Ensuring that risk remains within the boundaries established by the Board. Ensuring that the business line comply with risk parameters and prudential limits established by the Board. Remedial measures to address identified deficiencies and problems. Stress testing of credit portfolio, also in relation to environmental deficiencies and problems. Risk reporting Free template from www.brainybetty.com
12
Conclusion:
10/09/09
The starting of this article was the observation that banks are [ by their very nature ] in risk business and that they conduct risk management as an empirical fact ; the combination of these factors constitutes a positive theory for risk management in banks. However the central role of risk in banking business is merely a necessary condition for the management of risks. We know that value maximization is the ultimate goal of banks, documentation and adequate awareness about the risk in generality of staff is necessary so as to make risk management a part of corporate culture of bank. Free template from www.brainybetty.com
13
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