Unit 2 Flashcards
Corporate governance, creates a structure in order to:
- Set Corporate objectives and run daily operations
- Consider interests of all its stakeholder groups
- Manage the bank in a safe and sound manner
- Comply with relevant laws and regulations
- Protect the interests of its depositors
Board of Directors should:
• set strategic direction including risk tolerance
• advise on recruitment, oversee and review performance of senior management, set senior management compensation
• monitor performance of the bank
• be qualified
• meet regularly with senior management and internal auditors to establish and approve policies
• review reporting lines, authority and responsibilities of the banks senior management
Outside directors statement
Should be independent of internal and external influences and provide sound advice without participating in the daily management of the bank
EIOPA -Guidelines 1
The administrative, management or supervisory (AMSB) body should have appropriate interaction with any committee it establishes as well as senior management. Proactively requesting relevant information and challenging that information.
EIOPA Guideline 2
Org and operational structure.
Should have org and operational structures aimed at supporting the strategic objectives and operations. The ASMB should assess how changes to structure impact financial position. AMSB should have appropriate knowledge of the org, it’s entities and links and the risks arising from the groups structure.
EIOPA guideline 3
Any significant decisions should involve at least 2 people who effectively run the undertaking
BIS principal 1
The Board has overall responsibility for the bank, including approving and overseeing the management implementation of the bank’s strategic objectives, governance framework and corporate culture.
RASP - Risk architecture
Risk governance, risk reporting and kRIs
Risk governance- structures in place at group, division and business unit level in terms of both individual and collective roles and responsibilities for the identification and management of risk. Collective responsibilities are executed through a hierarchy of business, risk and other committees. Structures commonly adopt 3LOD
Risk reporting- process by which the business communicates on the risks it is facing especially in relation to risk appetite.
KRIs - Use KRIs or KCI that tell them whether their view of the world remains appropriate or up to date. Solvency 2 and Basel 3 talk of the need for KRIs. Building a robust indicator framework is complex- needs to be comprehensive while avoid information overload.
A RM Framework is simply a system by which:
• Risk management activity is linked to the orgs strategic objectives
• risks are identified, described and quantified
• risks are reported
• risks are controlled
• risks are monitored
RASP - architecture
Committee structure and TOR
Roles and Responsibilities
Internal reporting requirements
External reporting controls
RM assurance arrangements
RASP - Strategy
RM philosophy
Arrangements for embedding RM
Risk appetite and attitude to risk
Benchmark tests for significance
Specific risk statements/policies
Risk Assessment techniques
Risk priorities for current year
RASP - Protocols
Tools and techniques
Risk classification system
Risk assessment procedures
Responding to incidents, issues and events
Documentation and record keeping
Training and communications
Audit procedures and protocols
Reporting/ disclosures/ certification
3LOD - differentiate between
Those responsible for managing the risks within the business in accordance with appetite and those providing independent oversight
Who makes up the 3 lines?
First- risk and control owners. Mgt
Second- Risk Oversight. RM committee. RM function
Third- Risk assurance-internal audit
Risk architecture for large corporate
The Board- overall responsibility for RM
Exec Committee- Ensure RM embedded; review group risk profile
Group RM Committee- form strategy and policy; compile group risk register; receive reports from divisions; track RM activity in the divisions.
Audit committee- receive routine reports from RM committee; set audit program; monitor progress with audit recommendations
Disclosure committee- review and evaluate disclosure controls and procedures; consider materiality
Div mgt- prepare and keep up to date risk register; set risk priorities; monitor projects; prepare reports for RM Comittee
Risk documentation
Risk governance; risk response; event reports; risk performance
Protocols documentation should include
Risk assessment procedures;
Risk control objectives;
Risk resourcing arrangements;
Reaction planning requirements;
Risk assurance systems
4Ns and FOIL
Naive, novice, normalised and Natural
Fragmented, organised, influential, leading
Naive
Organisation are unaware of the need for ERM and/or do not understand benefits
Novice
Orgs are aware of the benefits of ERM but have only just started to implement an ERM initiative
Normalised
Orgs have embedded ERM into business processes but mgt effort still required to maintain adequate ERM activities
Natural
Orgs have a risk aware culture with a proactive approach to ERM and risk is reliably considered at all stages to gain competitive advantage
Fragmented
RM activities are fragmented and focused on legal compliance activities such as Health and Safety
Organised
Actions are planned to co-ordinate RM activities across all types of risk, although plans not fully implemented
Influential
Embedded ERM processes are influencing processes and management behaviour, but may not happen consistently or reliably
Leading
Consideration of risk is a substantial factor in making business decisions and decisions about strategy are ERM based
RIMS -risk maturity model
Ad hoc; initial; repeatable; managed; leadership
McKinseys risk maturity model
Initial transparency - compliance with basic standards/regs; reduction of regular surprises
systematic risk reduction - avoiding unexpected large loss events; stability to enable growth plan; professionalised mgt
risk return management - ROE improvement requirements; competitive pressure; navigating trade offs
Risk as competitive advantage - top mgt focus on risk adjusted performance; finding niche in mature marketplace
RIMS - function:
helps bind together the work that the risk function and the operating divisions carry out, particularly where there are multiple divisions or departments contributing information to the central risk management team
Key benefits to using a RIMS
the uniformity of data gathering,
storage and analysis that the system makes possible and;
reduced potential for errors and omissions when using a range of spreadsheets.
4Ns framework
Vertical axis
Competent or desirable
Incompetent/ undesirable ( behaviour)
Horizontal axis
Embedded/automatic
Intentional/ deliberate (effort)
Naive > Novice ^ Normalised < Natural
BIS principle 6
Banks should have an effective independent RM function, under the direction of a CRO, with sufficient stature, independence, resources and access to the board
BIS principle 8
An Effective risk governance framework requires robust communication within the bank about risk, both across the org and through reporting to the board and senior management
