AmBank Group Importance of Creating an Effective ... · PDF fileImportance of Creating an...

1

Importance of

Creating an Effective

Governance Risk

Framework

Presented to

AsiaRisk

Chief Risk Officers’ Club

By

Andrew S. KerrChief Risk Officer

AmBank Group

30th & 31st May 2012

Singapore

AmBank Group

2

2

Board of Directors

Board Committees

Risk Committee

Audit Committee

Group CEO Committee

Group

Traded

Market Risk

Committee

Group

Assets &

Liabilities

Committee

Group

Portfolio

Management

&

Credit Policy

Committee

Group

Operational

Risk &

Legal

Committee

Credit Risk

Committee

Group

Projects

&

IT

Committee

Group New

Products

Committee

Group Risk Management Department

Governance Structures

Remuneration Committee

Shariah Committee

3

3

Board of Directors

Board Committees

Risk Committee

Audit Committee

Group CEO Committee

Head Retail

Banking &

Wealth

Management

Head

Corporate &

Institutional

Banking

CRO

CEO

CFOHead of

Markets

Head Human

Resources

Management Structures

Remuneration Committee

Shariah Committee

Head of

Markets

* Non-Exhaustive List of

CEO Direct Reports

Importance of CRO

reporting directly to CEO

- Ranking Equally (at

least) equally with other

CEO direct Reports

4

Business Units, Product Heads, Customer

Facing

1. Risk Functions - Credit Risk, Market Risk

(traded & Non-Traded), Operational Risk,

Portfolio Management, Models & Model

Validation

2. Compliance Function*

Governance Structures

Audit

First Line

Second Line

Third Line

THREE LINES OF DEFENCE

Reporting ultimately to CEO

Reporting ultimately to CEO

Reporting to Board Audit

Committee

* May not be part of Risk Function – Could report separately to CEO

Maybe partly imbedded in First Line – BUT – hard

line reporting back to Second Line

5

Governance – Definition/Structure

The set of relationships between a company’s management, its

board, its shareholders and other stakeholders (“OECD”)

The system by which companies are directed & controlled

(“Cadbury”)

Structure – No one size fits all

• Mix of executives non-executive

• Mix of independent & Non-Independent

• Differing role of CEO/Chairman

• Stakeholder focus

6

Governance – Post GFC Reviews

Boards did not exercise sufficient control over

management

Boards lacked expertise and confidence needed to

challenge

Boards didn’t conduct proper performance appraisals

Unwilling or Unable to ensure risk management and risk

appetite were appropriate

F

A

I

L

U

R

E

S

7


Existing principles generally sound…..BUT:

Not well executed

Lack of clear allocation of roles & responsibilities

Board Reporting too full of detail / numbers –

versus the “so what” – what does it all mean /

what is the impact (on risk appetite settings) / what

options & recommended solution

C

O

N

C

L

U

S

I

O

N

S

Businesses didn’t fully understand risk

More independence & authority for the Risk

Function

* European Union

8


BCBS 2006 Guidance on Bank Governance

Boards should be appropriately involved in strategy

There should be clear lines of responsibility

throughout the banking organisation

Compensation should be consistent with long term

objectives/Strategy

B

C

B

S

G

U

I

D

A

N

C

E

Risks should be well understood & managed

* “BCBS” - Basil Committee on Banking Supervision

9


BCBS changes to Guidance on Bank Governance post

GFC in 2010

Boards should be active in strategy, organisation,

financial soundness & governance

Boards should have appropriate qualifications and

competence for the risks to be taken

Boards should be supported by competent, robust

& independent risk and control functions

B

C

B

S

G

U

I

D

A

N

C

E


10


NEW BCBS PRINCIPLES post GFC in 2010

Board has the ultimate responsibility for the Bank

• Approve & oversee corporate values/culture & governance

B

C

B

S

P

R

I

N

C

I

P

L

E

S

1


• Approve & oversee risk strategy

• Appoint, oversee and replace senior management

• Approve & oversee compensation

• Set / Approve risk appetite

• Approve & oversee key risk & compliance policies

• Approve & oversee internal controls

• Approve & oversee business strategy

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NEW BCBS PRINCIPLES post GFC in 2010

Board Qualifications

• Individually & collectively should possess appropriate

experience, competence and personal qualities

B

C

B

S

P

R

I

N

C

I

P

L

E

S

2


• Independence, commitment, diversity & training

• Have appropriate board sub-committees and conflict

resolution

• Document governance practices

• Hold regular reviews

Board Practices3

12

Governance – Board Challenges

1. Board is responsible to the stakeholders for the behaviour (culture) &

performance of the bank

iv. Ensuring the Board has the right skills & balance together with the

right information to make decisions

iv. Establishing an assurance process around delegations

i. Ensuring the agreed culture is engrained throughout the

organisation

iii. Where delegations are made there is clarity of responsibility &

accountability at management level

2. The Board cannot and should not run the bank on a day to day basis.

3. The challenge for any Board is:

v. Establishing appropriate risk appetite settings

ii. Determining responsibilities that can’t be delegated

13

Governance – Keys to Success

1. Effective risk management

oversight by boards

2. A risk centric culture

3. Strong governance

14

Does the

organisation

have an

appropriate

risk culture?

Are risk exposures

consistent

(individually & at a

portfolio level) with

the institutions

business

strategy/risk

appetite settings?

Does the

organisation have

an appropriate

governance

structure

(incorporating an

independent risk

function)?

Does the institution

have an integrated

firm wide approach

to risk (including

across geographic

borders)

Do you fully

understand your

institutions risk

exposures? – is the

approach sufficiently

forward looking? -

how do risk and

uncertainty factor

into decision

making?

Seven key questions:

Are they

consistent

(individually & at

a portfolio level)

with the

institutions

business

strategy/risk

appetite settings?

Governance – Keys to Success

Does the risk function have

sufficient authority to ensure

disputed decisions are

elevated within the

organisation?

15

Risk Management Structure

Head of Market

Risk

Head of Retail Risk

Head of Credit Risk

Head of Group Risk

Infrastructure

Chief Risk Officer

Head of Operational

Risk

Head of Risk

Projects

CRO’s Insurance/Assurance Affiliates

Portfolio Management & Policy

Risk Reporting

Provisioning

Risk Appetite Management

Stress Testing

Risk Models

Model Validation*

Basel II & III

ICAAP

16

Risk Management Objectives

• Strong Governance

C

O

N

S

C

I

O

U

S

D

E

C

I

S

I

O

N

S

• Strong Risk Appetite Framework

• Understanding Customer profitability & capital allocation

• Understanding Risk / Reward Dynamics – risk adjusted returns

• Strong Risk Recognition Capacity

• Conscious Decision Making

• Strong Portfolio Management Understanding / Management

• Customer Centric / Customer Focused

• Risk Centric Culture

• Strong Stress Testing Capability & Link to Risk Appetite

• Strong Liability , Capital & Liquidity Management

17

• Top Down (Risk Appetite Statement) AND Bottom Up (Detailed

Business Unit Asset Writing / Business Strategies) Approach

C

O

N

S

C

I

O

U

S

D

E

C

I

S

I

O

N

S

• Understanding risk adjusted returns on capital from diverse

business divisions

• Understanding risk adjusted returns

• How strong is your earnings base

• How strong is your capital base

• Understand your starting point – where are you today in

term’s of riskiness of portfolio’s

• Keep it Simple as possible matching your level of

sophistication

• What is the organisation’s capacity to absorb unexpected

losses?

• Strong Liability

Risk Appetite Framework

18


As at

31/3/2012

REWARDRISK

• Present Rating: BBB+ (S&P) ; BBB

(Fitch) ; Baa2 (Moody's); AA3 (RAM)

• Common Equity (CET 1) ratio : 8.4%

• Tier 1 capital ratio : 10.5%

• Total RWCA ratio: 15.0%

• ROE : 14.1%

• ROA : 1.43%

• Dividend : 40% of PATMI

FYE Mar

2013

• Maintain Ratings at BBB+



• Total RWCA ratio : 14.3%

• ROE : 14.2%

• ROA : 1.41%


FYE Mar

2015

• Maintain Ratings at BBB+



• Total RWCA ratio : 13.8%

• ROE : 15.6%

• ROA : 1.55%


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• Need to ensure that the Bank has sufficient Capital in place for the inherent risks

of their present and future business profile – to cover “Unexpected Losses” - and

that adequate return is generated from its invested capital (ROE & Risk Adjusted

Returns on Capital).

• Expected Loss is covered within the bank’s P&L.

• Unexpected Loss necessitates the holding of capital – the potential for actual

loss to exceed Expected Loss.


Credit

Risk

Traded

Market

Risk

Strategic

Risk

Reputational

Risk

Buffer

REQUIRED CAPITALFOR

UNEXPECTED LOSS

Non

Traded

Market

Risk

Insurance

Risk

Op.

Risk

Liquidity

Risk

ORCR TMR NTMR LR

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a) Strong Governance (including Independent Group Risk Function)

b) Well understood Risk Appetite of the AmBank Group supported by various

Portfolio Limits (credit & market risk) together with detailed Business Unit and

ultimate customer Asset Writing Strategies

c) Well Understood Policies

d) Strong Portfolio Management & Analytics

e) Dedicated Capital & Balance Sheet Management Function

f) Dedicated and automated Stress Testing (for Credit Risk portion)

g) Appropriately resourced & skilled staffing

h) Simple & Effective KRAs (tied to Risk / Reward)page 20

REQUIRED CAPITALFOR

UNEXPECTED LOSS

Credit

Risk

Traded

Market

Risk

Strategic

Risk

Reputational

Risk

BufferNon

Traded

Market

Risk

Insurance

Risk

Op.

Risk

Liquidity

Risk

21

• Grow portfolio

Grow (Buy)

• Maintain portfolio – minimal change to portfolio size

Maintain (Hold)

• Reduce Exposures and Exit Strategies

Reduce (Sell)


22

AmBank Group’s Board Approved Risk Appetite Statement:

AmBank Group targets to maintain credit rating of BBB+ (from international rating agencies),

supported by continued improvement in overall asset quality and portfolio diversification, and

through conservative management of our capital, funding, liquidity, and interest rate risk in the

balance sheet.

The Group targets ROE of 14.2% for FYE 2013, and increasing to 15.6% by FYE 2015.

Growth will come via further diversification of the loan portfolio into less volatile earnings

streams whilst maintaining a Retail / Non-Retail NPAT split of 50:50.

The Group intends to maintain sufficient quantity and quality of capital in excess of Basel 3

requirement – target for FYE 2013 are 8.7% for Common Equity Tier 1, 10.6% for Tier 1

Capital, and 14.3% for Total Regulatory Capital. Our capital requirements are robustly tested

over a three year period .

We enforce conservative approach to liquidity management, maintaining stable and diverfisied

funding base consistent with Basel 3 liquidity matrix (Net Stable Funds Ratio, and Liquidity

Coverage Ratios). Our targeted Adjusted Loan Deposit Ratio is within 90% range with

continually improving CASA deposit composition and market share.


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• Economic Capital is a unique tool that enables the measurement and aggregation of different types of risk

across diverse businesses..

• Economic Capital is defined as the amount of capital to cover “Unexpected Losses” to protect against

insolvency over a one year time horizon at a predetermined confidence level – the amount of capital to

ensure solvency

• Unexpected Losses reflect real risks taken by an organisation due to volatility in the value of assets &

liabilities within the firm’s portfolio.

• Expected Loss may be viewed as a cost of doing business – this should result in the pricing of products

incorporating a margin for Expected Losses – therefore there is no need to hold capital for expected

losses.

• If Unexpected losses are large they may consume profit margin (i.e., exceed the Expected Loss) and erode

capital.

Required Economic Capital

Page 23

• Economic Capital

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Economic Capital provides a common currency of risk that allows all risktypes to be expressed and aggregate on a common basis

• Economic Capital can be divided into three fundamental sources of risk,

each of which can be broken down further into sub-risk types:

Total Economic Risk

Volatility of economic earnings

(including changes in balance sheet

value)

CREDIT RISK

• Earnings volatility due

to variation in credit

loss

• Sub-risk types include:

• Default Risk

• Country & transfer risk

• Securitisation risk

Market Risk


to changes in market

prices or liquidity

• Sub-risks include:

• ALM risk

• Trading Risk

• Liquidity Risk

Operating Risk


to errors/omissions or

changes in operating

economics

• Sub-risks include:

• Operational risk

• Business risk

• Reputational Risk

Economic Capital

Page 24

25

Benefits of Economic Capital

Page 25

Economic Capital Enables:

• More accurate risk recognition

• More accurate pricing for risk

• Improved portfolio management

• The measurement and aggregation of different types of risk

(credit, market, liquidity & operational risk) across diverse

businesses

• Improved risk appetite settings

• Better capital allocation to business units

• Better allocation of human resources

• Better management of concentrations and correlations

• Better performance management (by individual, business unit

& legal entity)

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