RISK MANAGEMENT ADVISORY CRRH WORKSHOP 17 18 Dec 2018 Lome - - PowerPoint PPT Presentation

RISK MANAGEMENT ADVISORY

CRRH WORKSHOP

17 – 18 Dec 2018 Lome

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Agenda

• Integrated risk management

approach

• Why risk management
• Diagnostic assessment
• MEA Team
• Appendix

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Risk Management

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IFC offers a holistic risk management solution to strengthen financial institutions’ capacity and frameworks

Corporate Governance Policies, Processes, Practices Reputational, Legal and Strategic Risks Capital Adequacy Credit Risk Market, Liquidity and ALM Risk Operational Risk People, Training, Culture

Risk Management Benefits:

• Increases risk awareness in FIs
• Generates new opportunities
• Guards against substantial losses
• Adds shareholder value
• Ensures regulatory compliance
• Delivers strategic advantage
• Fosters stable financial system and

sustainable growth

Risk Management Tools:

• Link between strategy and objectives
• Identification of risks and
• pportunities
• Risk measurement & aggregation
• Monitoring, evaluation & mitigation
• Establishing controls
• Reporting and Communication

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ICAAP Credit Risk NPL Management Risk Governance

Board, Risk Framework Policy, BRC / ERC, ERM, 3LOD

Building Foundations

ICAAP Document / Policy Policy & framework

A comprehensive Risk Management offering to create value for our clients and investments

CRO Role / RM department

• rganization,

structure Board / Exec Risk integrated reporting Risk Appetite Framework & Statement Pillar 1+2 risk assessment and measurement Capital Adequacy / Planning / BS analysis Capital / macro stress testing Capital allocation / RAROC / RAPM / RBP Lending process end-to-end Credit file review / assessment / underwriting Rating / scoring models Economic capital (PD / LGD modeling) master rating scales Policy & Framework Analysis & reporting NPL unit

• rganization and

management Monitoring & workout activities / restructuring Collateral valuation Portfolio analysis & reporting Early warning indicators / other analytics Stress testing Credit administration / Collateral Model validation Provisioning policy & methods IAS / IFRS9 expected loss Impairment / write

• ff / Asset

disposal Risk Culture / Risk Strategy Risk limits framework / policy Economic Capital Credit Risk Limit Concentration risk analysis LMS / Credit risk systems

Non Financial Risk

Regulatory risk Reputational risk Strategic risk

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Market Risk Interest Rate Risk (Banking Book) Operational Risk ALM

ALCO Policies and processes

Building Foundations

Financial instruments classification, use & valuation Policy & framework ALCO Framework Trading book structure, policy, limits, operations Risk Management & measurement: Interest rate Risk Management & measurement: FX (+ other e.g.equity) Market risk capital, internal models, VaR, ES Liquid asset / funding plan / treasury management Ratios / gap analysis / reporting Full BS cash flow & product behavioral modelling Stress testing Policy & Framework Risk identification and assessment / risk register Risk Control Self Assessment (RCSA) Loss data mapping / database / other ORM tools KRI library / reporting / analysis Policy / Framework Ratios / gap analysis / reporting Dynamic BS & product behavioral modelling Interest rate scenario and stress test methods Earnings at risk / Economic value at risk / Economic capital Capital calculation (exclude AMA)

A comprehensive Risk Management offering to create value for our clients and investments (Continued)

Liquidity Risk

Funds transfer pricing Internal control / compliance / internal audit functions Business Continuity Plans IT Risk / Cyber security Derivatives / hedging Stress testing Treasury / Market risk systems Basel III requirements Liquidity contingency planning and procedures Yield curve construction / analysis Fraud risk New product risk assessment / Business Process Risk Mapping Stress testing, scenario analysis ALM Infrastructure ALCO Set-up ALM Governance ALCO reporting ALCO tools and practices

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How We Work: Engagement and Project Cycle

• Preliminary client

due diligence

• Gauging current

situation

• Site visits

IFC ENGAGEMENT CYCLE

DIAGNOSTICS PROJECT DESIGN

BOARD CLEARANCE & CLIENT AGREEMENTS IMPLEMENTATION

RESULTS & MONITORING 1 2 3 4 Signing Agreements: Advisory Service / Cooperation Agreement with scope and payment terms

• Results
• Monitoring &

Evaluation 5

• Objectives
• Project elements
• Work Plan
• TOR Design
• Phases
• Conditions

TYPICAL IMPLEMENTATION PROJECT CYCLE

DIAGNOSTICS

• SWOT analysis
• Benchmarking
• Best practice guidelines

RECOMMENDATION

• Prioritization of issues
• Implementation plan

IMPLEMENTATION

• Global experience and

local delivery team

• Supervision of activities
• Project monitoring and

supervision

RM Advisory Services

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Why Risk Management…….

• Supports the development of a stable financial

system with increased opportunities for sustainable growth

• Adds shareholder value by optimizing

risk/return trade-offs and capital allocation

• Builds a strong competitive advantage by

creating new opportunities and attracting new clients

• Leads to increased risk awareness across the
• rganization which benefits overall governance
• Guards against substantial losses and

insolvency

• Ensures regulatory compliance, contributes to

better decision making and enhances financial performance in a risk –conscious manner

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IFC Risk Management advisory enables banks to…

• Define overall governance, structure of the key

functions and determine how they should interact

• Identify, quantify, and prioritize their most important

risks and also ensure sound risk measurement, reporting, monitoring and management processes

• Gain an understanding of their risks and how they

can use this to improve strategic, financial, and

• perational decision making
• Gauge their risk bearing capacity in order to ensure

that their risk choices are aligned with their strategy and their capabilities

• Integrate risk-return related considerations into

important decisions such as capital allocation and product pricing

• Support the creation, development and

implementation of the core elements of their risk culture

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A key component of Risk Management advisory is a diagnostic

• A 360 degree view of key

risk management areas

• A snapshot of areas in

which risk management might be improved

• Benchmarking to

international best practice

• Identification of gaps

relative to needs

• Prioritization of

recommendations and roadmap

Operational Risk Market Risk Credit Risk Risk Governance ALM & Liquidity Management Risk Policies & Procedures ICAAP IT & MIS

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MEET THE RISK MANAGEMENT MEA TEAM

Patricia Mwangi Senior Operations Officer Africa Simba Mabhena Senior Risk Management Specialist Global

• Senior Risk Specialist responsible for the management and delivery of

RM advisory projects globally but based in Africa.

• Over 17 years of international banking experience working with financial

institutions in Africa, Europe and the Middle East.

• Specialization: Treasury risk management, trading, liquidity, ALM,

capital, balance sheet risk management and Basel framework.

• Senior Operations Officer responsible for the delivery of

risk advisory engagements in Africa

• Over 18 years in the financial sector working with banks

and microfinance institutions to serve small businesses and micro enterprises.

• Experienced in project management, financial

management and RM

• Specialization: Microfinance, Digital Finance, Risk

Management

Amine Benjelloun Operations Officer EMENA

• Over 15 years of professional banking experience in Europe, Middle

East and North Africa in commercial banking

• Specialties: Organizational transformation, RM & Internal Control, SME

banking & Information System Management

• Clients: Amen Bank, Banque Populaire, BMCE, BCP, Attijari wafa Bank

Fahd Diouri Associate Operations Officer EMENA

• Over 7 years experience providing advisory

and consultancy services for financial institutions in Algeria, France, Morocco and Tunisia,

• Specialties: Risk Management, Processes

reengineering and optimization, Product development

• Clients: Amen Bank, Al Barid Bank, Attijari

wafa Bank, Banque Populaire, SGA, …

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Appendix

13 Responsible Debt Collection in Emerging Markets: A global study on existing retail debt collection practices in emerging markets that recommends tangible actions lenders and collectors can take to promote responsible and ethical standards in the field. Corporate and SME Workouts: Lessons of experience and best practices for detecting, prioritizing, setting up or strengthening organization arrangement, and resolving distressed corporate / SME loans. The Risk Management Balancing Act - Developed and Emerging Market Practices: A review of global risk management practices and recommendations for financial institutions in emerging markets. Risk Culture, Risk Governance, and Balanced Incentives: Handbook brings new insights for financial institutions in EMs, defining specific factors that are indicators of culture, governance, & incentives in a strong RM framework; establishing a “maturity matrix” to benchmark these factors; and identify gaps.

KNOWLEDGE MANAGEMENT RESOURCES PUBLICATIONS

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Risk Assessment Framework: An in- depth, comprehensive diagnostic toolkit as well as resource for program & project

• management. The RAF platform

contains 400+ documents capturing good practice project implementation deliverables such as risk policies, reports, tools on all spectrum of banking risks.

iFig: FIG knowledge sharing platform

with links to the RAF. Content

• rganized by the following structure:

Marketing, Execution, Learning & Portfolio

KNOWLEDGE MANAGEMENT RESOURCES PLATFORMS

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Selected Risk Management Clients

Amen Bank - Tunisia Support improvements in Treasury/Market, ALM and Credit risk management functions Development of an integrated RM framework FCMB - Nigeria Guide development and implementation of best practices in credit risk management procedures and processes Equity Bank - Kenya, Uganda, Tanzania, Rwanda, South Sudan Strengthen overall RM framework to ensure consistent coverage of all risks across the Group Design policies, processes and methods for credit and market risk and an enterprise wide risk management Credit Moscow – Russian Federation Support improvements in Treasury/Market, ALM and Credit risk management functions Development of an integrated RM framework Demir Bank - Azerbaijan Develop systems and processes in all risk areas from Credit to Operational to enhance organizational structure and ensure proper risk governance BRAC Bank - Bangladesh Enhance Credit risk management, portfolio analytics and scoring capabilities VietinBank - Vietnam Upgrade Operational, Treasury/Market and Credit risk management Establish an integrated Risk division with enhanced policies, frameworks and methods across risk areas

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Selected Risk Management Clients: Sub-Saharan Africa

Context & Objective

• IFC support includes substantial term debt funding and various facilities for trade and

SME finance to a systemic regional bank based in East Africa

• The client needed to prepare for the upgrade of regulations based on Basel II and to

establish a program to improve its risk management capabilities based on international standards and to support its expansion strategy

IFC Involvement Results

• Detailed diagnostic review of entire risk

management framework practices across the

• Group. Presentation of findings and proposed

action plan to Board and Executive committees

• Development of structured program to enable

the bank to prioritize and address gaps and reach desired capability

• Comprehensive implementation engagement
• ver 18 months over the full spectrum of the

risk management framework to upgrade:

• Enterprise-wide risk
• Credit risk:
• ALM & Market Risk
• Operational Risk
• Post project monitoring and support to ensure

effective implementation of deliverables.

• The project transformed the approach to risk management to

design and establish an integrated risk management framework under a Group Chief Risk Officer.

• Construction of the Internal Capital Adequacy Assessment

Process (ICAAP) to enable submission of risk based capital plan to the central bank.

• 55 improved procedures/policies/tools introduced (vs. 25

expected), including integrated risk framework, credit procedures, risk rating methods, ALCO framework, ALM / liquidity models, operational risk library and assessment process

• Bank CEO embraced and drove the embedding of risk culture

across the organization incorporating it as an additional core

• value. Risk is a key consideration in strategic planning,

particularly in understanding the changes in the organization and market from digitization.

• The central bank acknowledged that the ICAAP was of high

quality and helped them to establish standard expected across industry

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Selected Risk Management Clients: East Asia & Pacific

Context & Objective

Client: The second largest bank in Vietnam (in terms of equity), significant mid size/ SMEs portfolio, leader in Trade Finance. 89% stake owned by the government. Objective: Commercialize and grow organically to become # 1 bank in Vietnam and grow into a regional player; aim to expand retail business with the support from strategic investor.

IFC Involvement Results

• In-depth advisory to upgrade Risk function,

Credit, Operational, Market Risk, Treasury, ICAAP

• Integrated Risk Division established / CRO

appointed

• Market Risk department established Treasury

reorganized, separate trading vs. banking book

• New Treasury Trading Policy, ORM framework,

MR framework issued

• Development of ICAAP and capital

management concepts to prepare regulatory application of full Basel II standards

• An effective integrated risk division functioning

with full oversight of all group activities and all risk types

• RM advisory contributed to better risk

assessment, stress testing, capital allocation, risk based performance measurement;

• Leverage: improvement of capital position with

new investors, greater consideration of capital and funding strategy to support growth objectives

• B2 Steering Committee, RM seen as strategic

importance, competitive advantage;

• Enhanced reputation with market leading

development of risk for B2 regulatory upgrade

• Help attract 2nd strategic foreign investor with

$743 million (20% stake) through focus on governance and risk advisory programs, hence strengthening capital base.

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Selected Risk Management Clients: Europe & Central Asia

Context & Objective

Client: Mid size private bank in Azerbaijan with strong focus on MSME segment. Corporate Governance team initiated IFC engagement. Objective: To ensure that the organization properly managed all risk areas and to provide guidance to the CRO and the Board.

IFC Involvement Results

• Policy and procedures on liquidity, market and
• perational risks developed
• Risk Committee and Asset-Liability Committee

were put in place

• Board and Chief Risk Officer trained on the

management of all risk areas

• Reporting templates for RM department

developed

• Credit process improvements introduced

(sound underwriting/approval process introduced, scoring upgraded)

• Portfolio monitoring and management tools

implemented

• The Bank completely overhauled risk

governance structure with a deputy CEO fully controlling risk management area.

• Improved credit risk management has reduced

the Bank's OLE from 22% to 6%.

• New operational risk self assessments have

uncovered 57 high priority findings which were timely addressed by the management.

• Better management of interest rate risk

decreased the Bank's IR gap ratio from 45% to almost 0.

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Selected Risk Management Clients: Middle East & North Africa

Context & Objective

• IFC support includes an investment package of equity and debt funding
• In partnership, there is a comprehensive Advisory Service package that supports the

Bank's capacity building in Corporate Governance and Risk Management

IFC Involvement Results

• Comprehensive CG project covering: Board

committees, charters, roles, authority matrices, evaluation, code of corporate governance

• Comprehensive RM project covering: Credit

Risk; Market Risk; Asset Liability Management (ALM); Operational Risk; Risk Governance

• Development of structured program to enable

the bank to prioritize and address gaps and reach desired capability

• Core modules to deliver the policies,

procedures and tools for the bank to

• implement. Ongoing advice and training
• Since the inception of the project, the bank grew

its assets by 29%, increased profit by 26%, reduced NPL rate by 60bps, improved capital adequacy ratio by 80bps and its share price

• utperformed nearly all region and global sector

indices.

• 90 improved procedures/policies/tools introduced

(vs. 23 expected), including Board risk framework, credit procedures, risk rating methods, treasury restructure, ALCO framework, ALM models and

• perational risk function.
• Achieved international best practice standards

with adoption of Basel II standards (1st in country)

• Gained global recognition for excellence in

banking within the region.

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Tailored support in the development of a Capital Management Framework, Stress-testing, and/or the build of ICAAP and supporting ICAAP capabilities

ICAAP Process and Documentation Capital Management Measurement and Planning

Regulatory Capital Economic Capital Book Equity Total Capital Loss Distribution

Overall Value Distribution Credit Risk Capital Market Risk Capital Operational Risk Capital IRRBB Risk Capital “Other Risks” Capital

+ + + +

Stress Test for Capital Adequacy

Comprehensive Stress Testing

CUSTOMIZED CLIENT RM SOLUTIONS

EXAMPLE: ICAAP AND CAPITAL MANAGEMENT

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Credit origination processes, credit risk models, validation, and on-going credit risk management and monitoring, and policies.

Credit Initiation by RM at Branches Approval by Credit Committee s Documen tation by CAD Disburse ment and maintena nce by CAD RM portfolio measure s & models Remedial Managem ent by SAM

Credit Process

Credit Grade Rating Category Definition External Equivalents: S&P, Moody’s 1 The borrower's capacity to meet its financial commitment on the facility is extremely strong. The facility is judged to be of the highest quality, carrying the smallest degree of risk. Interest payments are protected by large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AAA to AA+ Aaa to Aa1 2 The borrower's capacity to meet its financial commitment on the facility is very strong. The facility is judged to be of high quality, both presently and prospectively, carrying minimal risk. Long-term risk appears slightly larger than Rating "1", because margins of protection may not be as large as those of Rating "1" or fluctuation of protective elements may be of greater amplitude. AA to AA- Aa2 to Aa3 3 The borrower's capacity to meet its financial commitment on the facility is still strong. The facility is in the lower end of the high quality range but with very good prospects. The facility possesses favorable investment attributes, while it carries modest risk. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. A+ to A- A1 to A3 4 The borrower's capacity to meet its financial commitment on the facility is better than average. The facility is in the medium quality range, because it is neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. BBB+ to BBB- Baa1 to Baa3 5 The borrower's capacity to meet its financial commitment on the facility is average. The facility is judged to have speculative elements. Its future cannot be considered as well assured. The protection of interest and principal payments may be very moderate, therefore not well safeguarded during both good and bad times in the future. BB+ Ba1 6 The borrower faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the borrower's inadequate capacity to meet its financial commitment on the facility. The facility is judged to have more speculative elements than Rating "5", carrying above average risk. BB to BB- Ba2 to Ba3 7 The borrower exhibits potential credit weakness or downward trends which deserve close attention. The facility is vulnerable to nonpayment, but the borrower currently has the capacity to meet its financial commitment on the facility. Adverse business, financial or economic conditions will likely impair the borrower's capacity or willingness to meet its financial commitment on the facility. Assurance of interest and principal payments

• r of maintenance of other terms of the covenant over any long period of time may be small.

B+ to B- B1 to B3 8 The borrower is judged to be of poor standing which exhibits well-defined weakness that jeopardize the orderly liquidation of debt. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. The facility is inadequately protected. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. CCC+ to CCC- Caa1 to Caa3 9 The borrower exhibits weakness found in Rating "8" with the added provision that the weakness make collection of debt in full highly questionable and improbable. There are serious problems that partial loss of principal is likely. The possibility of loss is extremely high, but because of certain pending factors that may strengthen the assets, the facility's classification as estimated losses is deferred until a more exact status may be

• determined. Pending factors include proposed merger, acquisition, or liquidation procedures; capital injection; perfecting liens on additional

collateral; and refinancing plans. Reserves are generally established to provide for these uncertainties. CC to C Ca to C 10 The borrower deemed incapable of repayment of unsecured debt. The facility is considered uncollectible and of such little value that continuance as active assets of the bank is not warranted. It does not mean that the facility has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be effected in the future. D

P A S S

F A I L

Credit Ratings Credit Models

Pérdida Esperada Promedio Pérdida Inesperada Probabilidad de Pérdida Cantidad de pérdidas Reservas Capital Total = Reservas + Equity Riesgo No cubierto

Apetito por Riesgo Calificación crediticia objetivo

CUSTOMIZED CLIENT RM SOLUTIONS

EXAMPLE: CREDIT RISK PROCESSS & MODELS

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Interest Rate and Liquidity Risk Management, including the development of interest rate risk in the banking book processes and models, liquidity risk assessment, and support in the development of ALCO best practices. ALM and ALCO

0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01

• 10%
• 5%

0% 5% 10% P&L

VaR

Frequency

1% 99%

Market Risk VAR

O/ N 8D 14D 1M 3M 1Y 3Y >=10 6Y

Time to insolvency, if no rollover of funding is possible tflows Inflows

Net cumulative gap profile

O/ N 8D 14D 1M 3M 1Y 3Y >=10 6Y

Time to insolvency, if no rollover of funding is possible tflows Inflows

Net cumulative gap profile

Liquidity Risk Management

CUSTOMIZED CLIENT RM SOLUTIONS

EXAMPLE: MARKET RISK & ALM