LIA Credit Union Seminar

Transcription

1 LIA Credit Union Seminar Designed for you 26 th July

2 Pat O Sullivan LIA Chief Executive

3 Adding Value through Risk Management Justin McCarthy

4 Justin McCarthy Justin McCarthy has worked in roles in many firms, including Bank of America Merrill Lynch, PricewaterhouseCoopers and with the Irish Financial Regulator. This work has allowed him to see the changes in risk management since through and beyond the recent global financial crisis. His work on the PRISM risk based supervision framework with the Irish Regulator included exposure to banking, funds and insurance risk practices as well as the quantitative work done on the related impact models and the challenge in feeding valid financial data to these models. Justin McCarthy mccarthy/ He is Chair of the Global Board of the Professional Risk Managers' International Association (PRMIA). This is a professional body and education organisation for risk managers globally and has a network of over 50,000 around the world. He works as a Strategy, Governance, Risk and Compliance Consultant as well as lecturing and training. He works with a range of credit unions across the country as the risk and / or compliance functions and other work such as writing strategic plans. He also works with other financial services providers such as large banks. In 2017, he spent 6 months working with the Risk Leadership Team at Ulster Bank. Justin has a BSc from University College Cork and an MBA from the Michael Smurfit Graduate School of Business at University College Dublin. He is originally from Schull, west Cork.

5 Risk Management What do you think? Is this a topic worth discussing anymore?

6 Asking another audience What risk is there with this?

7 Actually it wasn t that bad

8 So Let s Try and Keep Risk Interesting

9 Things we all know: Risk Assessment Overview How do we best go about Identifying, Assessing and Monitoring risk? Top-down: E.g. Scenarios Bottom-Up: E.g. Process mapping Top-down: Capture risks that may not be found in a walk-through of processes Cross reference between both approaches Bottom-up: Capture risks as they are seen by the people that are working with the related processes

10 Things we all know: Risk Assessment Overview Questions that should be answered by a well designed risk assessment programme are: What are our top risks in rank order? What is the state of the controls that we have in place to deal with those risks? Are there control gaps? What are we going to do about the gaps? Who will own the action plans to address the gaps? What have we learned that we can apply to the next risk assessment cycle? How do we get people to Buy-in to this approach this is admitting to issues in your business: High level support / sponsorship? Briefing / Education sessions? Applying some kind of capital?

11 Things we all know: Connect the Data Board Management Summary Reports Data in the Credit Union: System Risk Management System Ledgers Spreadsheets

12 Things we all know: The Risk Register? Risk Category Risk Sub Category Risk.. Inherent Risk Credit Risk Credit Risk Credit Risk Credit Risk Credit / Underwriting Risk Credit Concentration Risk Credit / Underwriting Risk Credit / Underwriting Risk Inadequate verification of member's net disposable income Inadequate risk concentration limits on overall lending Loans are made to members who currently have arrears Related party loans are not properly approved Operational Risk IT Risk Risk that a server runs out of warranty Operational Risk IT Risk Disruption to operations and financial loss when a computer virus infects the IT system Operational Risk IT Risk Risk that log-in usernames/ passwords are not sufficiently controlled Is this useful from a Top Down as well as a Bottom Up view of your risks?

13 Things we all know: The Risk Register? These can get really detailed!

14 Collating our Risks IT Risk Cyber Risk IT Resiliance Risk that the Website is Hacked Risk that we are the victim of a "Phishing Attack" Risk that internal / external network is down Risk that the web server fails If we are told IT is one of our main risks, can we drill down into the detail?

15 PRISM already did this in 2011

16 Just Collate it up Get your Top 10 Risks Risk Sub Category Inherent Impact Inherent Probability Business Model Interest Rate Risk Board and Committee Quality Credit Control Anti-Money Laundering Succession Planning Strategic Plan Implementation Strategic Planning Data Protection Internal Fraud

17 Now talk about Risk

18 Make it More Visual if that Helps A picture paints a thousand words

19 Talking the Risk Language? Our Top 5 Risks? I don t know I guess IT is a risk maybe we should get new computers and a website? Have you seen that we have a risk register? It s in there I guess?

20 Talking the Risk Language! Our Top Risk is the business model and thus the viability of the credit union our projections are for a good surplus for the next 3 years. We review the related KPIs at the monthly board meeting. Our top operational risk is cyber risk but we are mitigating this with our IT security programme and the residual risk is within our risk appetite for that area.

21 Talking the Risk Language

22 Example: Operational Risk Taxonomies Much more detail is available to us in the Basel table

23 Example: Operational Risk Taxonomies Level 3 detail can help drive discussion on operational risk

24 Now talk about Risk But wait Have we really been Managing Risk?

25 Our Biggest Risk If we can t show we have a strategy / business model to make a surplus, then the CBI may take action

26 Have That Conversation

27 Questions? Thank you

28 Credit / Underwriting Processes Andrew Donovan Strategus

29 Andrew Donovan Background Summary Extensive financial experience spanning a 30 year career in financial services, Business Development, Debt Recovery, Commercial & Retail Banking with particular experience in process improvement, productivity initiatives and lean processes for financial institutions. Work Experience Worked in AIB Bank, Anglo Irish Bank, Ulster Bank & ACC / Rabo-Bank before commencing consultancy Work in June 2017 Key Skills include: Business Development, Credit Risk Management, Debt Collection, Negotiating, Management, Team Management & Analysis and implementation of Lean Processes.

30 The areas I hope to cover this morning: Lending position as it currently exists PRISM reports and concern & Addressing Central Bank Concerns Lending and underwriting going forward. How to get more from existing resources.

31 Lending position as it currently exists. Want to have a look at a number of charts from the Central Bank

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39 Looking back over the last 5 years what can we say: Credit Unions have held their share of the personal loan market. The average size of loan has increased slightly & heading in the right direction. The average length of loan is growing slowly but needs to lengthen. Still over 94% of Credit Union loans are personal. The volume and number of new loans has been growing since The excellent work on arrears continues to be evident.

40 PRISM reports on Lending & Risk Management and concern. Addressing Central Bank Concerns.

41 Given the importance of lending to the overall business model of credit unions of all sizes, we expect high standards of credit risk management from a prudential perspective. In order to satisfactorily manage and mitigate credit risk, credit unions must ensure that credit assessment processes are based on coherent and clearly defined criteria, the process of approving and amending loans is clearly defined and documented in credit policies and that the credit process is consistently implemented

42 CBI expectations of prudent lending include the following: 1. The member s ability to repay shall be the primary consideration in the underwriting process and Credit Unions must satisfy themselves that they are fully appraised of the borrower s financial position before granting a loan. 2. Comprehensive credit policies, reflecting the range of lending undertaken by the credit union. 3. Supporting rationale must be clearly documented with lending decisions. The decision to grant or deny a loan should be supported by a suitably detailed rationale.

43 A number of recurring risk issues were apparent in their engagements: 1. Weaknesses in underwriting practices, including lack of supporting rationale for loan approval. Failure to include such rationale makes it difficult to evidence and understand why certain loans were approved. 2. Failure to accurately assess member repayment capacity / debt-to-income ratios. We noted discrepancies and differences in approach as to how these ratios are calculated, or failure to consider the thresholds for such ratios, as per the approved policy of the credit union. 3. Incomplete or missing documentation on file in relation to the assessment of member s income and outgoings, including examples of missing member account statements, no evidence of income verification or analysis of income and outgoings as part of the underwriting process. 4. Evidence of top-up loans being issued to members, without appropriate consideration of the potential risky nature of this lending and the potential effects on member's overall indebtedness.

44 Supervision Loan Assessment Training Policy Process Procedure People

45 Lending policy, process & procedure Do this we need to understand the difference in the three: Policy vs. Process vs. Procedure A policy is a rule, regulation, or set of guidelines. A process is a high level set of things that must happen outlining what must happen in order to ensure compliance with a policy. A procedure is a specific, detailed series of actions that staff members must take in order to implement a process and comply with a policy.

46 Good Quality Supervision Loan Assessment Training Procedures Processes Policy People

47 Lending and underwriting going forward

48 What are our needs going forward? To increase income Expand offering Better use of IT People

49 What this means for our Business Opportunities Risks

50 Opportunities Increase the amount of our average loan Increase the length of the average loan Increase offering of Loan types Spread risk Widen who we deal with

51 Risks Cost Sectoral Knowledge Underwriting Issues Concentration levels Ongoing Management Staff IT

52 How do we mitigate these risks? Make sure we have a solid core to build on Plan meticulously for whatever expansion we choose Review our performance against the plan on a continuous basis Don t be rigid.

53 Conclusion Increasingly, it is expected that credit unions will proceed with product opportunities that can demonstrably add to earnings, if not immediately, over a reasonable timeframe. It is expected that credit unions boards and management will consider all the risks to which they will be exposed. It is their responsibility to ensure that they can demonstrate they understand the financial and other risks and to have the appropriate systems and processes in place to manage and control those risks, prior to undertaking such business. The Central Bank

54 How to get more from existing resources.

55 First identify then, Eliminate Waste The Lean Concept

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57 Radical Transformation of Collections Challenge Transform the performance and Management information of the credit arrears process while meeting the Banks KPI s and Central Banks codes. Solution Reviews the efficiency and effectiveness of the current process using lean methods and created a desired future state. Solutions presented where significant Improvements and Efficiencies could be achieved in Reviews Management and Collections. 25% Ensured Reduction in Task Time Highlights Milestone Based Approach Clear Timelines Measurable KPI s Standard Work Improved Collections 100% Compliance Central Bank Requirements 18% Cases Managed on-time 60% Process Time

58 Thank you

59 Networking

60 Credit Union Investments - Regulations, Risks & Returns Padraig O Sullivan

61 Topics to be covered Why are investments important for credit unions? Regulations - what investments can credit unions make? How to assess risk Why are investment returns so low? Outlook for investment returns

62 Why are Investments Important? Total Credit Union Assets: Total Credit Union Investments: 15bn 10bn

63 Why so much in Investments? The excess of shares over loans Since crash, people save more & borrow less Common to all credit unions and banks CU must try earn some return on these funds

64 Investment Regulations Strict regulations covering investments Types of Investments (investment classes) Who to invest with (investment counterparties) How long to invest for

65 Key Factor

66 CU Investment Regulations Permitted investment classes (since March 2018) a) Government Bonds of a euro zone country b) Supranational Bonds c) Bank Deposits d) Bank Bonds (senior bonds only) e) Corporate Bonds f) Approved Housing Bodies (via regulated entity) g) UCITS (i.e. funds) h) Shares/deposits in another credit union i) Shares of a society

67 In Summary 1. Bank Deposits (Approx. 75% of CU investments) 2. Bonds issued by governments, banks & large corporates (25%) Must be capital guaranteed Can t invest for longer than 10 years No more than 20% with any counterparty (less for corporates) Euro investments only

68 Risk Regulations exclude any high-risk investments But all investments carry some risk Obligation on board/investment committee to assess risk Key investment risk for CU s Counterparty Risk A guarantee is only as good as the party providing it Who are you giving our money to? How secure are they? What is their credit rating?

69 Credit Ratings Credit Rating Capacity to Repay Grade AAA Extremely strong Investment AA Very strong Investment A Strong Investment BBB Adequate Investment BB Faces major future uncertainties Speculative B Faces major uncertainties Speculative CCC Currently vulnerable Speculative CC Currently highly vulnerable Speculative C Has filed bankruptcy petition Speculative D In default Speculative

70 Investment Returns Year Rate of Return (sample CU) % % % % % (approx.) All CU s have seen significant fall in investment income

71 Why are interest rates so low? People saving more and borrowing less Too much money in the financial system ECB adding more via Quantitative Easing (QE) i.e. pumping even more money into the system ECB trying to keep rates at rock bottom Encouraging people to save less and spend more

72 3-Month Euribor % Historic & Projected 3 Month Euribor 5.00% 4.00% 3.00% 2.00% July % 1.00% 0.00% -1.00%

73 Are low interest rates here to stay? Euro zone interest rates largely controlled by the ECB Strong economic growth needed before it raises rates In particular, it will want to see higher inflation Target inflation rate 2%, currently only 1% ( core rate) Inflation needs to rise if interest rates are to recover

74 3-Month Euribor % Historic & Projected 3 Month Euribor 5.00% 4.00% 3.00% 2.00% July % 1.00% 0.00% -1.00%

75 3-Month Euribor % Historic & Projected 3 Month Euribor 5.00% 4.00% 3.00% 2.00% July % 1.00% 0.00% -1.00%

76 6.00% Historic & Projected 3-Month Euribor Historic & Projected 3 Month Euribor 5.00% 4.00% 3.00% 2.00% July % Market Projections 1.00% 0.00% -1.00%

77 Summary Interest rates at historic lows Probably not going lower, but recovery will be slow Likely to be several years before any major pickup in CU investment income No quick fix, unfortunately!

78 Questions? Thank you