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Upload: | global-association-of-risk-professionals-garp |
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Does Risk Culture Matter Sebastian Fritz-MorgenthalProf Natalie Packham February 2016
2
The views expressed in the following material are the
authorrsquos and do not necessarily represent the views of
the Global Association of Risk Professionals (GARP)
its Membership or its Management
1copy Frankfurt School of Finance amp Management gGmbHcopy Frankfurt School of Finance amp Management gGmbH
Academic Programmes
Professional Programmes
Seminars
Executive Education
Corporate Programmes amp Services
Research
International Advisory Services
Dr Sebastian Fritz-Morgenthal Julia HellmuthProf Natalie Packham
Does Risk Culture matter
2copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
Fritz-Morgenthal Hellmuth Packham Does risk culture matter The relationship between risk culture indicators and stress test resultsJournal of Risk Management in Financial Institutions Vol 9 1 71ndash84 2016
3copy Frankfurt School of Finance amp Management gGmbH
In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework
1 the identification and measurement of risk has big gaps
2 the capital and liquidity of banks is too low
3 ailing institutions are non-resolvable and
4 risk governance and culture seem to be weak
INTRODUCTION (16)
Basel 3 EMIR
LCR NSFR CET1 MREL
BRRD
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
4copy Frankfurt School of Finance amp Management gGmbH
Informal Definition
I know it is good risk culture when I see it
ndash Seggregation of duties ndash Three Lines of Defense
ndash Sanctioning excessive risk taking
ndash Regulation of compensation
ndash Reversal of the burden of proof
The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus
1 top management
2 accountability
3 effective communication and challenge and
4 incentives
INTRODUCTION (26)
This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)
FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available
at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
5copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (36)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
6copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (46)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
2
The views expressed in the following material are the
authorrsquos and do not necessarily represent the views of
the Global Association of Risk Professionals (GARP)
its Membership or its Management
1copy Frankfurt School of Finance amp Management gGmbHcopy Frankfurt School of Finance amp Management gGmbH
Academic Programmes
Professional Programmes
Seminars
Executive Education
Corporate Programmes amp Services
Research
International Advisory Services
Dr Sebastian Fritz-Morgenthal Julia HellmuthProf Natalie Packham
Does Risk Culture matter
2copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
Fritz-Morgenthal Hellmuth Packham Does risk culture matter The relationship between risk culture indicators and stress test resultsJournal of Risk Management in Financial Institutions Vol 9 1 71ndash84 2016
3copy Frankfurt School of Finance amp Management gGmbH
In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework
1 the identification and measurement of risk has big gaps
2 the capital and liquidity of banks is too low
3 ailing institutions are non-resolvable and
4 risk governance and culture seem to be weak
INTRODUCTION (16)
Basel 3 EMIR
LCR NSFR CET1 MREL
BRRD
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
4copy Frankfurt School of Finance amp Management gGmbH
Informal Definition
I know it is good risk culture when I see it
ndash Seggregation of duties ndash Three Lines of Defense
ndash Sanctioning excessive risk taking
ndash Regulation of compensation
ndash Reversal of the burden of proof
The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus
1 top management
2 accountability
3 effective communication and challenge and
4 incentives
INTRODUCTION (26)
This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)
FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available
at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
5copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (36)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
6copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (46)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
1copy Frankfurt School of Finance amp Management gGmbHcopy Frankfurt School of Finance amp Management gGmbH
Academic Programmes
Professional Programmes
Seminars
Executive Education
Corporate Programmes amp Services
Research
International Advisory Services
Dr Sebastian Fritz-Morgenthal Julia HellmuthProf Natalie Packham
Does Risk Culture matter
2copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
Fritz-Morgenthal Hellmuth Packham Does risk culture matter The relationship between risk culture indicators and stress test resultsJournal of Risk Management in Financial Institutions Vol 9 1 71ndash84 2016
3copy Frankfurt School of Finance amp Management gGmbH
In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework
1 the identification and measurement of risk has big gaps
2 the capital and liquidity of banks is too low
3 ailing institutions are non-resolvable and
4 risk governance and culture seem to be weak
INTRODUCTION (16)
Basel 3 EMIR
LCR NSFR CET1 MREL
BRRD
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
4copy Frankfurt School of Finance amp Management gGmbH
Informal Definition
I know it is good risk culture when I see it
ndash Seggregation of duties ndash Three Lines of Defense
ndash Sanctioning excessive risk taking
ndash Regulation of compensation
ndash Reversal of the burden of proof
The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus
1 top management
2 accountability
3 effective communication and challenge and
4 incentives
INTRODUCTION (26)
This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)
FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available
at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
5copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (36)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
6copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (46)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
2copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
Fritz-Morgenthal Hellmuth Packham Does risk culture matter The relationship between risk culture indicators and stress test resultsJournal of Risk Management in Financial Institutions Vol 9 1 71ndash84 2016
3copy Frankfurt School of Finance amp Management gGmbH
In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework
1 the identification and measurement of risk has big gaps
2 the capital and liquidity of banks is too low
3 ailing institutions are non-resolvable and
4 risk governance and culture seem to be weak
INTRODUCTION (16)
Basel 3 EMIR
LCR NSFR CET1 MREL
BRRD
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
4copy Frankfurt School of Finance amp Management gGmbH
Informal Definition
I know it is good risk culture when I see it
ndash Seggregation of duties ndash Three Lines of Defense
ndash Sanctioning excessive risk taking
ndash Regulation of compensation
ndash Reversal of the burden of proof
The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus
1 top management
2 accountability
3 effective communication and challenge and
4 incentives
INTRODUCTION (26)
This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)
FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available
at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
5copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (36)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
6copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (46)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
3copy Frankfurt School of Finance amp Management gGmbH
In the aftermath of the 2008 financial crisis regulators and industry identified four major shortcomings of the existing financial system and its regulatory framework
1 the identification and measurement of risk has big gaps
2 the capital and liquidity of banks is too low
3 ailing institutions are non-resolvable and
4 risk governance and culture seem to be weak
INTRODUCTION (16)
Basel 3 EMIR
LCR NSFR CET1 MREL
BRRD
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
4copy Frankfurt School of Finance amp Management gGmbH
Informal Definition
I know it is good risk culture when I see it
ndash Seggregation of duties ndash Three Lines of Defense
ndash Sanctioning excessive risk taking
ndash Regulation of compensation
ndash Reversal of the burden of proof
The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus
1 top management
2 accountability
3 effective communication and challenge and
4 incentives
INTRODUCTION (26)
This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)
FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available
at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
5copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (36)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
6copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (46)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
4copy Frankfurt School of Finance amp Management gGmbH
Informal Definition
I know it is good risk culture when I see it
ndash Seggregation of duties ndash Three Lines of Defense
ndash Sanctioning excessive risk taking
ndash Regulation of compensation
ndash Reversal of the burden of proof
The Financial Stability Board (FSB) published a framework for assessing risk culture from a supervisory perspective The FSB puts four areas into focus
1 top management
2 accountability
3 effective communication and challenge and
4 incentives
INTRODUCTION (26)
This refers to a statement by US Supreme Court Justice Potter Stewart from 1964 available at httpblogswsjcomlaw20070927the- origins-of-justice-stewarts-i-know-it-when-i- see-it (accessed 21st October 2015)
FSB (2014) lsquoGuidance on supervisory interaction with financial institutions on risk culturersquo Financial Stability Board Basel available
at httpwww financialstabilityboardorgpublicationsc_131118 pdf (accessed 21st October 2015)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
5copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (36)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
6copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (46)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
5copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (36)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
6copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (46)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
6copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (46)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
7copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (56)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
8copy Frankfurt School of Finance amp Management gGmbH
INTRODUCTION (66)
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
9copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
10copy Frankfurt School of Finance amp Management gGmbH
bull Analysis puts a focus on the 81 ECB stress-tested banks within the countries of Austria Belgium Estonia Finland France Germany Latvia Lithuania Luxemburg the Netherlands Slovakia and Slovenia
bull We have excluded the banks of stressed countries with regard to support by the EFSF or other EU mechanisms in the years 20132014 (Greece Ireland Italy Portugal Spain and Cyprus) and where a significant number (if not all) of the participating banks had quite extreme stress test results
bull Further we have excluded Malta (only one bank which is a subsidiary of Deutsche Bank) as well as Poland and Ukraine both of which are not part of the Eurozone
bull Stress Test Indicators are derived directly from the EBA ECB Comprehensive Dataset
bull Risk Culture Indicators are retrieved and assessed from individual annual reports risk reports CSR reports
DATA ndash 81 BANKS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
11copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Category Main Characteristics
1 Regulatory
Requirements
Level of concordance with basic regulatory requirements with regard to risk
management
2 Business Strategy Check whether the bank has a well-defined sustainable business and risk strategy
so that potential risks can be identified
3 Governance Categorizes if appropriate senior management to operate the business and an
adequate supervisory authority to govern the bank are in place
4 Portfolio Considers selected balance sheet related figures assumed as relevant artefacts for
the quality of a bankrsquos risk culture
5 Employees Measures average completed training hours of employees and the employee
fluctuation
6 Risk Strategy Checks if appropriate risk governance and processes as eg committees are in
place and what different risks are considered as relevant for the specific bank
Also the handling of individual risks is taken into account
7 Reputation Asks if banks make a statement about their reputation and related risks Litigations
and their transparent disclosure are scored
8 Other Effects One-off effectsevents related to risk management and risk culture are considered
9 Cultural Indicators Behavioural indicators and attitudes recognizable in the reports
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
12copy Frankfurt School of Finance amp Management gGmbH
DATA ndash RISK CULTURE SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull Risk Culture Indicators (RCIlsquos) are derivedfrom publicly accessible data such asannual reports
bull For each category an institution receives a score between 1 (bad outcome) and 5 (good result)
bull Box-whisker plots show interquartile rangein boxes
bull Outliers ndash shown as dots ndash are observationsthat lie beyond 15 times the interquartilerange
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
13copy Frankfurt School of Finance amp Management gGmbH
1 Net Profit respectively Total Loss divided by Total Assets
2 CET 1 Capital divided by Total Assets
3 Total Risk Exposure divided by Total Assets
4 CET1 Ratio
5 Leverage Ratio
6 NPE Ratio
7 Aggregated Adjustments Due to the Outcome of the AQR
8 AQR adjusted CET1 Ratio
9 Adjusted CET1 Ratio after Baseline Scenario
10 Aggregate Adjustments Due to the Outcome of the Adverse Scenario of the Joint EBA ECB Stress Test to Lowest Capital Level Over 3-Year Period
11 Adjusted CET1 Ratio after Adverse Scenario and
12 Capital Short-Fall (for the score the shortfall enters as follows yes=1 no=5)
DATA ndash STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
Stress test indicators (STIlsquos) derived from EBA data set
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
14copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
15copy Frankfurt School of Finance amp Management gGmbH
THE MODELRISK CULTURE SCORE amp STRESS TEST SCORE
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull What is the relationship between risk culture and stress test outcome
bull Does an institution will well-established risk culture perform well in stress test and vice versa
bull Investigate relationship between risk culture score (RCS) which is thesum of RCIlsquos and STIlsquos
bull Investigate relationship between stress test score (STS) which is derivedfrom STIlsquos and and RCIlsquos
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
16copy Frankfurt School of Finance amp Management gGmbH
RCS = α
- β1 RWAAssets
+ β2 Leverage Ratio
THE MODELRISK CULTURE SCORE amp STRESS VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
bull On average
ndash increase of leverage ratio by 1 percentage point corresponds toincrease of RCS of 03219 points
ndash increasing relative risk exposure by 10 percentage points corresponds to RCS that is lower by 04519
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
17copy Frankfurt School of Finance amp Management gGmbH
THE MODELSTRESS TEST SCORE amp RISK CULTURE VARIABLES
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
STS = α + β1 Governance
+ β2 Other Effects
bull One grade highergovernance score corresponds to25-30 higherSTS
bull Other effects(bdquoone-off effectsldquo) correspond toweak risk culture
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
18copy Frankfurt School of Finance amp Management gGmbH
OVERVIEW
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
1 Introduction
2 Data
3 The Model
4 Conclusions
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
19copy Frankfurt School of Finance amp Management gGmbH
1 Risk Culture and Stress Test results are correlated
2 Two risk culture indicators show significant explanatory power of Stress test outcomes
1 Governance
2 Other Effects
3 Two stress test indicators show significant explanatory power of our predefined Risk Culture Score
1 RWA Assets
2 Leverage Ratio
4 Some more intuitive indicators do not have any explanatory power
1 Net Profit Assets NPE Ratio CET1 Ratio
2 Strategy Risk Strategy Reputation
Summary Encouraging results but more research is certainly needed
CONCLUSIONS
GARP - Frankfurt Chapter Meeting - Does Risk Culture matter - 23021016 - SebastianGFritzgmxde
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved
C r e a t i n g a c u l t u r e o f r i s k a w a r e n e s s reg
Global Association ofRisk Professionals
111 Town Square Place14th FloorJersey City New Jersey 07310USA+ 1 2017197210
2nd FloorBengal Wing9A Devonshire SquareLondon EC2M 4YNUK+ 44 (0) 20 7397 9630
wwwgarporg
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated to preparing professionals and organizations to make better informed risk decisions Membership represents over 150000 risk management practitioners and researchers from banks investment management firms government agencies academic institutions and corporations from more than 195 countries and territories GARP administers the Financial Risk Manager (FRMreg) and the Energy Risk Professional (ERPreg) Exams certifications recognized by risk professionals worldwide GARP also helps advance the role of risk management via comprehensive professional education and training for professionals of all levels wwwgarporg
4 | copy 2014 Global Association of Risk Professionals All rights reserved