New Era of Risk Management Challenges Evolution and Challenges Presented by Regulatory Requirements

Tomas Spurny

CEO

Banca Comerciala Romana

June 09th,, 2015

EU Banking regulations and Regulatory institutions Two distinct ages

1974 1988 2004 2009 2011 2013 2014 >2014

Regulations

Central

Regulatory

Institutions Committee of

European

Banking

Supervisors

(CEBS)

European

Banking

Authority (EBA)

– replaces

CEBS

European

Central

Bank (ECB)

ECB supervisory

role of EU zone -

Single Supervisory

Mechanism (SSM)

Basel

Accord

Basel II

Basel III

Bank Recovery

and Resolution

Directive

Basel IV ??

30-35 years of light regulation 6-7 years of complex regulations and more to come

2

0

1

0

AQR Stress

tests

ITSs

RTSs NPE

Forbearance

ANACREDIT

New

Finrep

IFRS9

Basel 2.5

Basel

Committee

2

EU Banking regulations vs. Crises Regulations are reactive and acts as “lessons learned”

5

1974 1988 2004 2009 2011 2013 2014 >2014

Regulations

Triggers Barings Bank

bankruptcy

(1995)

Financial crisis

(2008)

Failure of

Bank

Herstatt

Basel

Committee

Basel

Accord

Basel II

Basel 2.5

Basel III

Bank Recovery

and Resolution

Directive

Basel IV ??

30-35 years of light regulation

2

0

1

0

AQR Stress

tests

ITSs

RTSs NPE

Forbearance

ANACREDIT

New

Finrep

IFRS9

6-7 years of complex regulations and more to come

Purpose of the new regulations Acting as safeguards

• Control functions

• Management bodies

• Remuneration principles

• Organizational structure

• Independence

• Committees

• Own funds computation principles

• Transitory measures

• Dividends

• New reporting requirements and disclosures

• Capital & Own Funds

• Capital requirement

• Pillar I vs. Pillar II

• From simple to very complex methodologies for quantification

• Risk control function

• Risk Appetite

• Risk Tolerance

• Stress testing

• Recovery Plan

• More than 20 risk types and sub-types

• Measurement & Assessment

Risk Management

Capital Management

Governance Accounting

4

Managing the risk in banking with complex regulations Main Pros and Cons

7

Assure stability over the entire EU banking system

Assure common risk management language, tools and systems for measurement

for all EU countries

Financial solidity and stability of the EU banking system

Not all EU countries are mature in terms of tax collection, “black economy”,

financial education

The new regulations become more and more complex, large (as volume) and

sophisticated

Trigger huge consumption of resources

Trigger the need of more experienced and skilled human resources

Romania as part of EU Is Romanian Banking System ready to cope with the new requirements?

8

Challenges / Opportunities

GDP per capita around of 45% below

EU average

No real capital market

High liquidity

Margins on a continuous pressure:

regulatory requirements; interest

rates; low lending demand

Increasing need for risk management skills of bankers

Lending under strict criteria of equity, cash flows, debt capacity

Debt burden still under EU average

Short term focus on solving the legacy of

bad assets

The banks still have to satisfy their counterparties And this becomes more and more challenging as the requirements are

increasing from all of them

9

Processes

IT

Systems Financial

Accounting

HR, PR,

Legal

Business

Shareholders/

Investors

Clients

Regulators

(NBR, ECB,

EBA)

Employees

They

want

more!

They

want

more!

Special focus and requirements on risk management Capital and Other ratios to be managed

10

Before 2014

Total Capital Ratio Capital

RWA (Credit +Market +Operational) = > 8%

After 2014

2014 2015 2016 2017

Common Equity Tier 1 Ratio min 4.5% min 4.5% min 4.5% min 4.5%

Tier 1 Capital Ratio ( CET1 + Add T1 ) min 6 % min 6 % min 6 % min 6 %

Total Capital Ratio min 8% min 8% min 8% min 8%

Capital Conservation Buffer not applicable not applicable 0.625% 1.25%

Countercyclical Buffer not applicable not applicable (0% - 0.625%) (0% - 1.25%)

Other Systemically Important Institutions Buffer not applicable not applicable (0% - 2%) (0% - 2%)

Systemic Risk Buffer 0% ( 0% - 5%) ( 0% - 5%) ( 0% - 5%)

+

LCR

NSFR

Leverage

+

SREP

MREL*

Recovery plan

*minimum requirement for own

funds and eligible liabilities

Skills and resources on risk management Last two years – continuously increased pressure

Just to count some external and internal actions and exercises where risk management

functions had to respond in a short time and a prompt manner:

- AQR

- EBA Stress Test

- Annual NBR controls

- 3-5 external audit actions

- Adaptation to new Basel III requirements

- Adaptation to new FINREP reporting requirements

- Ad-hoc reporting and answers towards regulators (local and group)*

- Implement new and advanced measures and models to manage risk

- Prepare and launch new projects in order to accommodate future requirements like IFRS9,

AnaCredit, AMA changes; new Liquidity reporting requirements

* BCR estimate: this process increased around of 5 times compared

with the past years

More resources; skills; IT

systems update and upgrade;

increased costs

9

Governance of risk management (1/2) Need to be organized as part of internal control system

12

Inte

rna

l co

ntr

ol fr

am

ew

ork

Risk Management

Compliance

Internal Audit

Governance of risk management (2/2) To be a second line of defense

13

THE THREE LINES OF DEFENSE MODEL

FIRST LINE SECOND LINE THIRD LINE

Risk management

as performed at each

Business

Unit/Operational level

Primary ICS functions

a. Risk Management

b. Compliance

Develop and maintain the

systems which ensure:

effective and efficient

activities, adequate risk

control, prudent activities

and compliance with internal

and external regulations.

Oversight over First Line

Internal audit

Ensures an independent

review / oversight of the

first two lines of defense

BCR Risk Management Organization (1/2) Fit into the overall structure

14

General Shareholders’ Assembly

Supervisory Board

Audit and Compliance

Committee

Internal Audit DivisionManagement Board

Assets Liabilities

Committee

Chief Executive Officer

CEO

Executive VP

Corporates & Markets

Credit Committee

Executive VP Financial

CFO

Operational Risk

Management Committee

Executive VP

Operations & IT

COO

Executive VP Remedial,

Restructuring and

Recovery CWO

Executive VP Retail &

Private Banking

Executive VP Risk

CRO

Nomination Committee

Remuneration

Committee

Risk Committee

Financial Steering

Committee

BCR Risk Management Organization (2/2) A modern structure, regulatory compliant and aligned with market practice

15

Executive VP Risk

CRO

STRATEGIC RISK

MANAGEMENT/ RISK

CONTROLLING DIVISION

CORPORATE

UNDERWRITING

DIVISION

SECURITY MANAGEMENT

AND BUSINESS

CONTINUITY DIVISION

RETAIL RISK

MANAGEMENT

DIVISION

FINANCIAL CRIME

PREVENTION

DIVISION

CORPORATE LOAN

ADMINISTRATION

DIVISION

COMPLIANCE

DIVISION

SENIOR EXECUTIVE

DIRECTOR – RISK

RISK GOVERNANCE AND

PROJECTS DIVISION

Couple of questions and uncertainties Will the near future offer us answers to all of these?

Are we able to manage the future risks (and mainly unknown risks) when the

regulations are reactive and acts as “lessons learned”?

Will both banks and regulators be able to deal with the new challenges in terms of

human resources (number and skills) and IT infrastructure changes?

Will the banks be an engine for the economic growth when they are mainly focused

on assuring regulatory compliance, instead of concentrating the resources on

managing a healthy and profitable business?

What is the actual level of independence of a financial institution in managing its own

operations?

Is Romanian Banking System ready to be part of the unique and common EU

banking system, including complexity, common risk and regulatory language and

competition?

14

Thank you!

15