The Impact of the Financial Crisis in Corporate Governance

Transcription

1 The Impact of the Financial Crisis in Corporate Governance Isabelle d Arthuys Groupe BPCE

2 Risk management and financial institutions: a quick background The scale of the financial crisis triggered by the bankruptcy of Lehman Brothers in 2008 led governments to question the suitability of corporate governance rules and practice within financial institutions International regulatory bodies such as the Basel Committee and the European Commission found that strenghthening corporate governance was at the heart of financial market reform and crisis prevention A shared diagnosis was that although corporate governance did not directly cause the crisis, the lack of risk awareness and effective control mechanisms contributed to excessive risktaking 2

3 BPCE: a specific organization BPCE banking model is based on a three-tier structure Two cooperative banking networks, shareholders of BPCE 20 BANQUE POPULAIRE BANKS 17 CAISSES D EPARGNE BPCE A central institution The role of the central institution is, notably, to define the policy and strategic objectives of the Group, to oversee the Group with respect to its liquidity, capital adequacy, and risk management, to represent it on regulatory bodies and to negotiate national and international agreements. NATIXIS and the other subsidiaries Natixis, a CAC 40 publicly-listed company provides solutions in the area of corporate & investment banking, savings solutions and specialized financial services Crédit Foncier, Banque Palatine, banks belonging to the BPCE International et Outre-mer network, etc. 3

4 A coordinated Group approach to Risk Management The organization of risk management in Groupe BPCE is decentralized under the auspices of a central organization Banking establishments are responsible for managing their risks within the framework of the rules laid down by BPCE which defines common policy principles for risk management ensures a coherent risk management approach controls the overall efficiency of risk management In accordance with: The solidarity principle applicable to Groupe BPCE Legislation and by-laws governing BPCE Supervision on a consolidated basis of Groupe BPCE 4

5 The scope of risk management in financial institutions Financial institutions profits are partly sourced from risktaking activities therefore a sound and comprehensive risk management framework is about ensuring optimal risk taking without endangering the viability of the entity. Such framework comprises: A risk appraisal framework including > Risks identification and assessment > Risks monitoring on an ongoing basis with effective internal controls adjusted to risk level of exposure A risk governance and oversight including > Appropriate standing of the risk management function > Close involvement of board members in risk-taking decisionmaking process 5

6 Risk management: identification, assessment and monitoring Financial institutions address the main following risks: Financial risks: market risks, ALM risks Credit risks: counterparty, country or intermediary Operationnal risks: losses due to external events or failure or maladjusment of procedures, personnel or internal systems Compliance risks: Risk of legal or regulatory sanctions, financial loss or loss to reputation a financial may suffer as a result of its failure to comply with laws, regulations, rules, self-regulation and codes of conduct applicable to its business activities. 6

7 Risk management: identification, assessment and monitoring Risk mapping is more than identification of a risk as such: it involves confronting a risk to a business environment and/or an industry process Eg: Infringement of AML regulations is a generic compliance risk. In order to bear practical meaning it has to be evaluated in context of an industry process such as «Opening a bank account». Content of such risk contains KYC (Know your Customer) rules for instance. Risk mapping is at the cross-lines of a generic risk and a specific business process As an example, and using this methodology, 145 compliance risks are listed in the risk map of BPCE Group. 7

8 Risk management: identification, assessment and monitoring Risk mapping not only presents a list of risks the financial institution may incur, it also evaluates the level of exposure of the institution as to each risk Each identified risk is evaluated against criteria such as procedures, training, controls, ressources and management. The resulting score establishes the level of exposure The level exposure is also dependent on incident records and results of ongoing controls as applied to the identified risk A roadmap is then drawn including mitigation measures and adjusted controls. Ressources may be re-allocated accordingly. The risk map is updated and reviewed yearly with business lines and risk management function and validated at board level. Relevant committees monitor the implementation of the roadmap. 8

9 Risk management: governance and oversight Appropriate standing of risk management function Risk management and compliance functions are independent from the business units or revenue-generating functions They also have a direct reporting line to the board and in the case of BPCE central organization are members of the Executive Committee. As per French banking regulations, their names are reported to the controlling authorities They are part of decision-making at all levels of the financial institution: product design, mergers and acquisitions, remuneration policies. Internal procedures ensure that risk management staff is properly trained and adequately skilled to carry out its functions 9

10 Risk management: governance and oversight Involvement of board members in risk-taking decision-making process Decision-making process relies on cross-functionnal committees: they involve board members, operations managers and risk managers Specialized committees are in place and address specific risks or items: credit risks, market risks, compliance risks, norms and policies, internal controls. Each committee has a charter setting out its scope, mandate and working procedures. An overarching risk committee is established at Group level. It is responsible for advising the board on the intitution s overall current and future risk appetite and strategy Conclusions and findings of the risk committee are discussed within the Audit Committee 10