POST CRISIS RISK MANAGEMENT BUILDING A CORPORATE CULTURE. PHILIPPE CARREL

Transcription

1 POST CRISIS RISK MANAGEMENT BUILDING A CORPORATE CULTURE PHILIPPE CARREL philippe.carrel@thomsonreuters.com

2 IS THE CRISIS OVER YET? House prices / T1 Banks China growth / US exports Oil prices / Inflation When Risk is Truly Managed

3 BASLE II HAS CRASHED ON EACH OF ITS 3 PILLARS P1- Minimum capital requirements failed to ensure business sustainability underestimating systematic risk P2 - Supervisory review processes failed to create sound risk management procedures, overlooked systemic risks P3 - Disclosure policies failed to bring market discipline and transparency

4 PREVIOUSLY: CUMULATED RISKS Traditional Risk Framework Commercial Bank Investment Bank Trading Operations Market Risk Framework Credit Risk Framework Retail exposure Corporate exp Trade Finance Guarantees Assessment of ALM (Pillar2) ALM scenarios Project Finance Securities Hedging Credit Derivatives RW Exposure Internal VaR models Trading books Portfolios Remittances Rating based or predictive modelling Operational Risk RW Capital Operational Risk Add-on Aggregation per business line Emphasis on models Business scenarios buried within models Capital allocation thought for most probable outlook How much capital do we need to comply?

5 A COSTLY ASSUMPTIONS OF NORMALITY Probability of Loss Baseline Scenario Severity 1 Scenario Catastrophic Scenario Repetitive tail events Expected losses outside the scope of Basle II Scope of Basle II Loss provisions Risk capital Magnitude of Loss Outside the scope of BII Risk financing using core capital Insurance Income Statement Balance Sheet Debt and Shareholders Guarantee Providers Basle considered high impact low frequency events to be idiosyncratic in nature they aren t.

6 HOW DO TRADERS HEDGE TAIL RISKS? Probability of Loss Baseline Scenario Severity 1 Scenario Tail Risk Scenarios Magnitude of Loss 1. Consider risk factor(s) 2. Net out exposures under baseline scenario 3. Estimate portfolio sensitivity under high severity scenarios 4. Square remaining exposure with instrument of reverse sensitivity 5. Stress-test the hedges under extreme scenarios, with particular attention to volatility, liquidity and correlations

7 POST-CRISIS: DISTRIBUTED RISKS New Age Risk Management Root Risk Factors (examples) Baseline Scenarios Severity 1 Scenarios Catastrophic Scenarios Structural Exposure Forex STIR Fixed Inc Currencies Basis risk Vega Liquidity Sensitivity IR Basis Curve Credit exp Commercial Bank Investment Bank Trading Books Rates Credit Curve Liquidity Aggregation per risk factor (fixed and variable) Emphasis on business scenarios rather than models Cyclical Exposure Inflation Cdts & Energ CPI Credit exp Micro-hedges as opposed to enterprise wide approach Capital allocation for worst case scenario Exposure Sensitivity Max Loss ST Liquid Valuation sp Credit spread Price Slippage T1 Capital Baseline T1 Capital Severity 1 T1 Capital Catastrophic How much capital will keep us in business?

8 POST-CRISIS: DISTRIBUTED RISKS DISTRIBUTING RISK EXPOSURE AND AGGREGATING SENSITIVITY Risk Committee Macro-Scenario Interest Rates Fixed Income Desk Back-Office Dept Mortgage Loans Securitisition Dept Long/Mid/Short curve risk IR Volatility Basis X-Cy Basis Liquidity Slippage... Volumes Commercial Product shifts impact New Ctpies Volume Resources changes Settlements Pre-payments $ Sensitivity under Scenarios PDs Funding costs Pre-payments Model risks Liquidity Volatility Sum of $ Sensitivity under Scenarios Risk of Macro-Scenario Interest Rates Risk Committee

9 PREVIOUSLY: ONE WAY OVERSIGHT STRUCTURE Conventional Risk Reporting & Escalation Procedures Operations Business Units Risk Management Audit & Controls Exposure Sensitivity Limits Compliance reports Exposure assessments Value at Risk Legal Capital Dept Procedures Methodology Integrity Committees Management Business Managers Executive Committee CEO Board Sub-Committees Regulatory Capital Steering Committee Risk Executive Committee Rigid system of committees, complex reporting structures Impedes quick action, poorly adapted to volatile markets and tail risks Geared toward regulatory compliance rather than policies Scenarios buried within models Do we have ERM reports?

10 POST-CRISIS: DISTRIBUTED CAPABILITIES New Age Risk Control & Reporting Framework Business Units Operations Risk Management Exposure Mitigation Operations Sensitivity Risk scenarios Net exposure /scenarios Limits Compliance to risk policies Risk Committee Management Audit & Controls Procedures Methodology Integrity Risk Executive Compliance Committee Referral CEO Risk Policies Board Business units responsible for risk and compliance to policies Stress test owner defines their own scenarios Auditors control macro-scenarios and adequacy with risk policies Risk Committee and CEO accountable for day-to-day risk Audit and CEO present macro-scenarios to Board Does ERM enable our strategy?

11 Distributed Risks, Distributed Capabilities Funding Strategy Information Workflow External Communications POST CRISIS BUILDING A CULTURE OF RISK MANAGEMENT Corporate Funding Strategy Strategy Shareholders Risk Appetite Board & CEO Risk Cmtee Distributed Risk Risk factors Scenarios Mitigation Exposure mgt Regulators Exposure Sensitivity Max Loss Risk Policies Bus Operations Macro Scenarios Creditors Distributed Capabilities Mitigation strategies Liquidity/Funding tactics Internal compliance Internal Communication Audit

12 There is risk in banking [ ] but the risk appetite that built up in recent years is going away [ ] it killed itself by thinking it eliminated risk by building these very fancy models of products. That is going away. Stephen Green, Group CEO, HSBC, PHILIPPE CARREL philippe.carrel@thomsonreuters.com

13 LIQUIDITY RISK MANAGEMENT INTERNAL BALANCE & EXTERNAL SHOCKS model risk data correlations volatility COLLATERAL POLICIES market depth price slippage ALLOCATION OF ASSETS VALUATION SENSITIVITY LIQUIDITY ctpy ratings interbank rates curve effects FUNDING systemic risks STRATEGY regulatory changes payments collateral liquidity mortgage valuations

14 LIQUIDITY RISK MANAGEMENT INTERNAL BALANCE & EXTERNAL SHOCKS model risk data correlations volatility COLLATERAL POLICIES market depth price slippage ALLOCATION OF ASSETS VALUATION SENSITIVITY LIQUIDITY ctpy ratings interbank rates curve effects FUNDING systemic risks STRATEGY regulatory changes payments collateral liquidity mortgage valuations

15 LIQUIDITY RISK MANAGEMENT INTERNAL FACTORS OF LIQUIDITY RISKS LIABILITIES ASSETS COLLATERAL Liquidity Concentrations Term structure Credit ratings Credit events Payments Regulatory impact Allocations Concentrations Duration Conditional Exposure Sensitivity Volatility Mkt Depth Valuations Cash Payments Securities Liquidity Asset valuations Implicit duration Reg. & Legal Framework

16 LIQUIDITY RISK MANAGEMENT ALL SPECIFIC RISK RELATES TO VALUATIONS, TURNS TO LIQUIDITY FUNDING ASSETS COLLATERAL GEO/POL/LEGAL Retail Wholesale Interbank Issuance Private loans Corp loans Project Merchant Investments Securities Structuring Trading Cash Securities Sub-Investment Private RE Commercial RE Investments Commodities Guarantees Geo-political risk Legal framework Regulatory risks Covenants Guarantees VALUATION RISKS LIQUIDITY RISKS

17 JUST HOW GLOBAL HAVE BANKS GROWN? Gross Foreign Assets (top) & Liabilities (bottom) of Bank Systems (US$ Tn, source BIS) 2007 GDP (US$ Tn, source World Bank) est. GDP (US$ Tn, source IMF)