5574636 Risk Management in Commercial Banks

5/21/2018 5574636 Risk Management in Commercial Banks

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RISK MANAGEMENT

IN COMMERCIALBANKS


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ByBy

Malik DilawarMalik Dilawar

Vice President/PrincipalVice President/Principal

Senior Training Manager, North,Senior Training Manager, North,

UBL Training Centre, sla!a"ad,UBL Training Centre, sla!a"ad,

Pakistan#Pakistan#

Phone$ %%&'()*('+'%-.011#2,Phone$ %%&'()*('+'%-.011#2,

3a4$ %%&'()*('+'*)'*3a4$ %%&'()*('+'*)'*


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5isk !anage!ent "y

co!!ercial "anks (( Ti!e toha!!er o6t the chinks Financial markets the world over have

undergone far-reaching changes in the lastdecade, spurred by deregulation andliberalization, as well as rapid developments incommunication and Internet technologies.Banks in Pakistan have, however, generallynot paid enough attention to the potentialrisks and to evolve mechanisms and systemsto control and manage them in line with theglobal standards and procedures.


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5isk !anage!ent "y

co!!ercial "anks (( Ti!e to

ha!!er o6t the chinks

s the banks no longer operate in a

protected and regulated environment,there is an imperative need for them todevelop and improve their capability tounderstand the changes in their economicenvironment and other circumstances

having a critical bearing on their businessactivities.


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5isk !anage!ent "y

co!!ercial "anks (( Ti!e toha!!er o6t the chinks

!isk management is a comprehensive

process adopted by an organization thatseeks to minimize the adverse effects it ise"posed to due to various factors --economic, political or environmental,

some of them inherent to the business,others unforeseen and une"pected.


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5isk !anage!ent "y

co!!ercial "anks (( Ti!e toha!!er o6t the chinks

Present practices#situationPrevalent at commercial banksre$uires a hard look and call for agreater understanding by bank

managements and boards of therisks involved in their operations.


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What is RISK ? It is the potentia that e!ents e"pe#te$ o%

&ne"pe#te$' (a) ha!e an a$!e%se e**e#t on a

*inan#ia instit&tion+s #apita o% ea%nin,s-

Ris. is inhe%ent in a /&siness an$ *inan#ia

a#ti!ities-

The ,%eate% the RISK asso#iate$ 0ith an

a#ti!it) the ,%eate% potentia to ,ene%ate a

hi,h %et&%n- Ban.s $o ta.e RISKS The /i,,est RISK is

Not Ta.in, A RISK-


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e*initiono* Ris. Mana,e(ent

Ris. Mana,e(ent is the p%o#ess o*

identifying, measuring, monitoring and

controlling%is.s

These *o&% points a%e essentia to %is.

(ana,e(ent

This p%esentation 0i #o!e% the (aini$enti*ie$ %is.s in /an.s an$ $ete%(ine ho0

0e %is.s a%e /ein, (ana,e$-


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I$enti*)in, Ris.s

7here 5isks sho6ld "e denti1ied

Instit&tion50i$eB&siness ines

%o$ts

T%ansa#tions


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Serving the Needs of Depositor

Borrowers and Banks

Co!!ercial Bank

lending/n8est!ent in8ol8es three

parties $

2- The s&ppie%s o* *&n$s The $eposito%8

3- The &se%s o* *&n$s The /o%%o0e%s8

9- A *inan#ia inte%(e$ia%) Ban.8 s

SupplierSupplier

BankBankBorrowerBorrower


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Chaen,e in Ban.in,

:Ban.in, is an a%t o* st%i.in, a

/aan#e /et0een Ris.an$

Re!en&e-;


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T>ICAL BALANCE SEET O@ A BANK


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T>ICAL BALANCE SEET O@ A BANK


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RISK MANAGEMENT

RAGNI!ATINRis. (ana,e(ent is a $e#ent%aiFe$ p%o#ess ,&i$e$ /)

#ent%a) esta/ishe$ poi#ies an$ %&es -Senio% sta**

#o((ittees $e*ine #%e$it #&t&%e an$ esta/ishe$ o!e%apoi#ies an$ %&es-Line (ana,e(ent $esi,ns en$in,

p%o#e$&%es an$ #ont%os %is.-

The%e a%e &s&a) *i!e (ao% o%,aniFation ,%o&ps that

pa%ti#ipate in %is. (ana,e(ent p%o#ess-These ,%o&ps a%e%esponsi/e *o% $e*inin, 'i(pe(entation 'an$Ho% %e!ie0in,

%is. (ana,e(ent poi#ies'%&es an$ p%o#e$&%es 0ithin the

/an.-


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Banking Risk

Ta.in, %is.s #an a(ost /e sai$ to /e the/&siness o* /an. (ana,e(ent-A /an. that is

%&n on the p%in#ipe o* a!oi$in, a %is.s o% as

(an) o* the( as possi/e' 0i /e a sta,nantinstit&tion 'an$ 0i not a$e&ate) se%!e the

e,iti(ate #%e$it nee$s o* its so#iet)-On the

othe% han$ a /an. that ta.es e"#essi!e %is.s o%

#%e$it is (o%e i.e) 'ta.es the( 0itho&t

%e#o,niFin, thei% e"tent o% thei% e"isten#e 0i

s&%e) %&n into $i**i#&t)-


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9ll "6siness in8ol8es so!e type o1 risk and

"anking is no e4ception#

Credit risk is !a:or category o1 risk o1 the

"ank#t occ6rs whene8er there is a possi"ility

that is the c6sto!er cannot !eet contract6alo"ligations to the "ank in ter! o1 $

5 The $ei!e%) o* $o#&(ents o% #o((o$ities

0he%e the /an. /ea%s the 0hoe %is. 05

5 The pa)(ent o* p%in#ipa 'inte%est '*ees o%

#o((issions-


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The o!e%a o/e#ti!e o* Ris. Mana,e(ent is to in#%ease

ente%p%ise !a&e

INCREASE VALUE BY

Providing

AppropriateLeveland

Allocationof Capital

IncreasingReturn on

Capital

ImprovingConsistencyof Earnings


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The best way to reach thisobjective is to understandthe fullrisk environment within which you operate...

ExternalEnvironment

;cono!ic

Conditions

Co!petition

Nat6ral Catastrophes

Social/LegalTrends

Political/

5eg6latory

Cli!ate Technology

;4pansion/

Di8ersi1ication

People

C6lt6re

Distri"6tion

Processes

5isk 9ppetite

InternalEnvironment

3inancial 5isk

9sset 5isk

0perational 5isk

Lia"ility 5isk

B6siness 5isk

;8ent 5isk


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and the completeset of strategies that are available to you...

FinancialStrategies

Pricing

Sec6ritisation

Capital

Str6ct6re

Prod6ct Mi4

9sset

9llocation

OperationalStrategies

ncenti8e Progra!s

Technology

nternal Controls

Distri"6tion

Prod6cts

C6sto!er Ser8ice

Market Strategy


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and to apply this knowledge

in a holisticrisk management framework, to drive value

Holisticallyanage

Financial andOperational

Ris!s

Optimise Financialand OperationalStrategies

"nderstand InternalandExternal Environment

Capital

Return

Consisten

cy

Increase #alue


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To accomplish all this in a consistent manner, it is necessary to implement a

continual management process

$evelop

%estStrategies

Implement

Strategies

onitor

Performance andEnvironment


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In s&((a%)' Ente%p%ise Ris. Mana,e(ent

Ao0s )o& to $ete%(ine the ne#essa%) #apitae!e' $epo) &nnee$e$ #apita an$ i(p%o!e

%et&%n on #apita

En#o&%a,es p%ope% ao#ation o* #apita to

se,(ents an$ s&ppo%ts pe%*o%(an#e t%a#.in,

%o!i$es a (etho$ *o% ens&%in, that

ente%p%ise o0ne%s %e#ei!e p%ope%

#o(pensation *o% %is.s ass&(e$

Provides Competitive Advantage


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RISKS

MST BE

5 KNOWN

5 NERSTOO5 JANTI@IABLE

5 CONTROLLABLE H ACCETABLE H

BANKABLE


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5S=S 39C;D B> B9N=S

CREIT RISK

MARKET RISK

INTEREST RISKLIJIIT> RISK

OERATIONAL RISK

CONTR> RISKOWNERSI H MANAGEMENT RISK


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CREIT RISK

THE R!" TH#T THE $%&'$R (%$RR$)ER* )&&

+$T %E #%&E T$ RE#- THE E%T (&$#+* /+ER

THE TER0! $1 THE $R'+#& #'REE0E+T (&$#+

#'REE0E+T*.

20$!T 3RT3#& R!" + %#+"+'

2RE4/RE! 0$!T !/%5E3T6E 5/'E0E+T

20/!T %E 0#+#'E 3#RE1/&&-


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MARKET RISK

3H#+'E! + 0#R"ET R#TE! #+ R3E! )&&

0#R #+ $%&'$R7! #%&T- T$ ER1$R0

/+ER THE 3$+TR#3T +E'$T#TE %ET)EE+THE #RTE!.

2+EE! 0$+T$R+' $1 3H#+'E! + R3E!$1

3$00$TE!, RE#& E!T#TE, ET3.


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INTEREST RATE RISK

+TERE!T R#TE R!" ! THE E8$!/RE $1 #+

+!TT/T$+9! 1+#+3#& 3$+T$+ T$ #6ER!E

0$6E0E+T! + +TERE!T R#TE!, )HETHER

$0E!T3 $R )$R&:)E.

2 #+$THER 3RT3#& R!"

2 RE:R3+'; 0!0#T3HE! +EE T$ %E #RE!!E


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LIJIIT> RISK

THE R!" TH#T # %#+" )&& %E /+#%&E T$

#33$00$#TE E3RE#!E! + %&TE! $R

T$ 1/+ +3RE#!E! + #!!ET!. !/3H R!"!

#R!E )HE+ THE RER3+' $R 0#T/RTE! $1

#!!ET! $ +$T 0#T3H TH$!E $1 %&TE!.

2 3RT3#& R!"

2 0#T/RT- 0!0#T3HE!

2 %#!E $+ 0#R"ET 3$+T$+! < ER3ET$+!


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OERATIONAL RISK

TIS RISK ARISES @ROM TE LACK O@

E@@ECTIE INTERNAL CONTROLS AN AITING

ROCERES- ARTICLARL> IMORTANT IS

TAT TE BANK SOL AE GOO INTERNAL

CONTROLS

Ris. o* a *ai&%e in the /an.+s p%o#e$&%es

0hethe% *%o( e"te%na #a&ses o% as a %es&t

o* e%%o% o% *%a&$ 0ithin the instit&tion-


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CONTR> RISK

R!" #!!$3#TE )TH THE E3$+$03,

!$3#& #+ $&T3#& E+6R$+0E+T $1 THE

%$RR$)ER7! 3$/+TR-. 3$/+TR- R!" !0$!T ##RE+T )HE+ &E++' T$ 1$RE'+

'$6ER+0E+T!; THER #'E+3E! #+ $THER

3/!T$0ER!.

2 %#+"7! H#6+' '&$%#& RE!E+3E


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OWNERSI RISK

THE R!" TH#T $)+ER! ; !H#REH$&ER!,

RE3T$R! $R !E+$R 0#+#'E0E+T 0'HT %E

/+1T 1$R THER RE!E3T6E R$&E! $R THE-

#RE #3T/#&&- !H$+E!T.

2 #&!$ # 3RT3#& R!"

2 =THE %E!T )#- T$ R$% # %#+" ! T$ $)+ T=


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5S= M9N9?;M;NT@a(iia%isation o* Mana,e(ent 0ithRis.s

I(pe(entation o* Inte%na Cont%osSo&n$ Inte%na A&$it S)ste(

E**i#ient MIS in a#e

Co(petent G%o&p o* Ris. Mana,e%s%o(pt A#tion D Monito%in,


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Ris. J&anti*i#ation

Ris. &anti*i#ation te#hni&es /e#o(in,i(po%tant to $ete%(ine #apita %e&i%e(ents

Mo%e %eian#e on /an.s+ o0n s)ste(s *o%

i$enti*)in, an$ (ana,in, %is.

Not on) &antitati!e aso p%o#esses an$

#&t&%e+ s#%&tin) o* (o$e $esi,n

$ata inte,%it)

%is. (ana,e(ent %eso&%#es

!ai$ation

in$epen$ent a&$it

(ana,e(ent &n$e%stan$in,


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EOSITS IN A BANK

RERESENTS WAT ? :Co((e%#ia Ban.s s&ppo%t a (o&ntain o* RISK

on a sen$e% #apita /ase- The /&. o* thei%ia/iities is %e$ee(a/e at AR an$ onEMAN' 0ith $eposito%s %e,a%$in, thei% (one)as pe%*e#t) sa*e-;

:>et /an. assets a%e s&/e#t to #%e$it %is.'(a%.et %is.' an$ sette(ent %is.- With

inte%nationa en$in,' the%e is *o%ei,n e"#han,e%is. an$ t%ans*e% %is.- Aso the%e is (ana,e(ent%is. an$ %is. o* *%a&$-;


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GENERAL

Man) o* The Ris.s O!e%ap-

Nee$ To Be E!a&ate$ In The Conte"t O*

In$i!i$&a Instit&tion With On5site %esen#e-

E!a&ation o* Ris.s Re&i%es An

n$e%stan$in, o* The Ban.' its C&sto(e%

Mi"' its Assets D Lia/iities An$ The

E#ono(i# An$ Co(petiti!e En!i%on(ent-


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NT;5N9L C0NT50LS RISK RATING S>STEM @OR CREITS

CLOSE MONITORING O@ OERATIONS

COMETENT CREIT MANAGERS

AL CONTROLS

S>STEM TO ST> TE INSTRIAL

AN ECONOMIC EELOMENT @OR

ESTABLISING TARGET AREAS O@INESTMENT


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Reliance on Internal Control &

Once the management system is

in place, supervisors can

determine that the systems areworking properly by testing the

systems. If the systems are

inadequate, the scope of the

inspection can be expanded so

that risks are properly identified,


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Principles of Control

Segregation of duties

Dual control

otation of assignments or duties

!wo weeks continuous vacation

"dequate #ompensation


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NT;5N9L 9UDT S>ST;M IMLEMENTATION O@ INTERNAL

CONTROLS

ROIES SECONAR> RISK REIEW INEENENC-


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O'(ective of Internal Audit

!he overall ob$ective of internalauditing is to assist all members ofmanagement in the effective

discharge of their responsibilities byfurnishing them with ob$ectiveanalysis, appraisals,recommendations and pertinentcomments concerning the activitiesreviewed. !he internal auditor,therefore, should be concerned with

any phase of banking activity


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Inspection Procedures for

Internal Auditors )or!Organi%ational Structure of the "udit

Department

Independence of the "udit &unction

"uditors 'ualifications

"udit Staff 'ualifications#ontent and (tili%ation of the "udit

&requency and Scope Schedule


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MS

AN AEJATE :MIS; ELS IN TIMEL>

IENTI@ICATION O@ RISKS

REORTS ON MATRIT> OR INTEREST

RATE MISMATCES REORTS ON ROBLEM CREITS

REORTS ON CREITS SOWING

ETERIORATING TREN IN RISK RATING


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5S= M9N9?;5S

JALI@IE

OBECTIE

ENO> AEJATE ATORIT>ABILIT> TO CORRECTL> ANAL>SE @OR

CRRENT ACTION AN @TRE

REICTIONS

ROMT IN ACTION

5574636 Risk Management in Commercial Banks

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