Managing Change in the Banking
Sector
Federation of Indian Chambers of
Commerce and Industry
“Global Banking: Paradigm Shift”
Bangalore 14/9/2004
Chris Matten, Executive Director
PricewaterhouseCoopers
Pwc 1
Agenda
• Understanding of global trends
• How international banks are reacting to these challenges
• Implementation of a comprehensive risk management function
• Challenges in implementing these ideas in Asia
Pwc 2
Top 10 concerns of bankers*
1. Complex Financial Instruments
2. Credit risk
3. Macro economy
4. Insurance
5. Business continuation
6. International regulation
7. Equity markets
8. Corporate governance
9. Interest rates
10. Political shocks
* Banana Skins 2003 – The CSFI’s annual survey of the risks facing banks
Pwc 3
Regulatory developments – Basel II and IFRS
1. Complex Financial Instruments IFRS
2. Credit risk Basel II
3. Macro economy Basel II
4. Insurance
5. Business continuation
6. International regulation IFRS Basel II
7. Equity markets
8. Corporate governance Basel II
9. Interest rates Basel II
10. Political shocks
…there is considerable overlap between bankers’ concerns and those of their supervisors
Pwc 4
Agenda
• Understanding of global trends
• How international banks are reacting to these challenges
• Implementation of a comprehensive risk management function
• Challenges in implementing these ideas in Asia
Pwc 5
Risk management is moving into governance
Uncertainty tamed? The evolution of risk management in the financial services industry, PwC/EIU July 2004
Pwc 6
…but not yet linked to strategy or compensation
Pwc 7
3 “soft” risks to worry about: reputation….
Pwc 8
…. political risk….
Pwc 9
…and business/strategy risk
Pwc 10
Agenda
• Understanding of global trends
• How international banks are reacting to these challenges
• Implementation of a comprehensive risk management function
• Challenges in implementing these ideas in Asia
Pwc 11
Understanding risk managers
• Late 1980’s:
• Likely shaped by the Chicago markets, financial academics
• Very quantitative, but perhaps naive
• Embarrassed by the 1987 crash and other events
• Early-mid 1990’s:
• Influenced by the various debacles
• Most likely to be a cop
• Late 1990’s:
• Even more shaped by risk management “failures”
• Realizing the inter-connectedness of markets
• Seriously quantitative
Pwc 12
The risk manager today
• “cop” model unsustainable
• Very quantitative
• Understands that risk has many nuances and subtleties
• Nothing is independent
• Realises that risk management can be taught to laymen
• Realises that there is no absolute protection
“The real trouble with this world of ours is not that it is an unreasonable
one, nor even that it is a reasonable one. The commonest kind of trouble is
that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a
trap for logicians. It looks just a little more mathematical and regular than it
is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies
in wait”
GK Chesterton
Pwc 13
Development of the risk management
function
1980s 1990s 2000+
Focus on
Aligned to business drivers
stakeholder
Focus on link profitability
to
performance
& capital Integrated
efficiency
E.g.. RAROC Risk & Value
Management
Focus on Integrated
alignment to Performance
objectives Management
Objectives- Institution-Wide
oriented Risk Risk
Management Management
Focus on Focus on risk
Focus on governance quantificatio
loss & reporting n
prevention
Value-at-Risk
Risk Monitoring
Risk Control & Reporting
Frameworks
Integrated across risks / businesses
Pwc 14
Agenda
• Understanding of global trends
• How international banks are reacting to these challenges
• Implementation of a comprehensive risk management function
• Challenges in implementing these ideas in Asia
Pwc 15
“Once we have implemented Basel II we can
stop”
• Innovation beyond Basel II is important
• Risk modelling is an emerging discipline
Pwc 16
“The more advanced the approach, the less
capital required”
• Potential risk of shutting out entire market segments
• Practice in using the tools essential
20.00%
18.00% Basel I
16.00% Basel II Standardised
14.00% Basel II IRB Approach
Risk Capital
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Aaa Aa A Baa Ba B
Credit Quality
Example:
• Unsecured loan
• Maturity 2.5 yrs
• LGD (loss given default) 50%
• Tier 1 ratio (=risk capital ratio) 8%
Pwc 17
“Basel II will make the world less risky”
• Potential for pro-cyclicality greatest in markets with least
experience in using the tools
Pwc 18