Promotional Banks: An Introduction to Reputational Risk Management Heidi Rudolph Friedemann Kühn 3 March 2016 KfW Bankengruppe
Content 1 Promotional banks in Europe 2 Reputational risks vs. mission 3 Management of Reputational Risk in the KfW 4 Summary
Promotional Banks: Overview in Europe Europe KfW (Germany) CDC/AFD (France) CDP (Italy) ICO (Spain) Germany Federal Promotional Banks (Landesförderinstitute) Rentenbank (Agricultural Bank) 3
Promotional banks: Mission and ownership The business model of a promotional bank is essentially defined by its mission. EIB Supports projects that make a significant contribution to growth and employment in Europe. 28 members of the EU KfW KfW has many tasks. As a promotional bank, KfW Group supports change and encourages forward-looking ideas in Germany, Europe and throughout the world. 80% Germany 20% federal states ICO CDC/ AFD ICO promotes economic activities contributing to growth, the development of the country and improving the distribution of the national wealth growth and employment in France Development in the world (esp. Africa) Spain France 4
KfW: Array of functions Domestic promotion International business We promote Germany We support internationalisation We promote development Mittelstandsbank Kommunal- und Privatkundenbank/Kreditinstitute KfW IPEX-Bank KfW Development Bank, DEG Promotion of SMEs, business founders, start-ups Promotion of housing construction and refurbishment, improved accessibility and education Financing of municipal infrastructure and global loans International export and project finance Promotion of developing and transition countries Promotion of environmental and climate protection 5
Business model KfW Customer Financing partner Capital market Promotional mandate Defined by KfW Law State liability Institution owned by Federal Republic and federal states 6
Mission vs Reputational risks 7
Germany and Europe face challenges from megatrends Climate change and environment Globalisation / technical progress Demographic change Climate and environmental protection, globalisation / technical progress and demographic change we face great challenges today. KfW is one of the world s leading promotional banks. It applies its decades of experience on behalf of the federal government and the federal states to improve the economic, social and ecological living conditions around the world. 8
Mission and Reputational Risk in the KfW-context Requirement poverty reduction and economic development in developing countries Support of german industry Efficient Risk Management => risksensitiv Zinssätze Reputational Risk Public perception of carbon- Financing Exportation in problematic countries Structurally weak areas (SMEs) pay higher interest Changing or stopping parts of the business is not always an option. 9
Causes of reputational risk Primary vs. Secondary risk Reputational Risk Primary Risk Reputational risk as primary risk Can originate risks in other risk types Secondary Risk Reputational risk as a possible consequence of other risks ( operational risk, credit risk ) IT-blackout (loss of costumer data) => Reputational risk by OpRisk high credit losses => Reputational risk by credit risk 10
Further example 11
Management of Reputational risks in KfW 12
Our Organization Three lines of defence in reputational risk context Managing board Committees 1st line of defence local RepRisk-management in business units 1st line of defence 2nd line of defence central RepRisk-Controlling identification notification management of risks in the area of responsability 2nd line of defence Development of a framework for Identification, Notification and Management of reputational risks 3rd line of defence Internal Audit RepRisk structural organization was built according to established OpRisk structural organization Orientation on the-three-lines-of-defence-modell Prevention of conflicts of interest by separation of responsability 13
Assignment of duties Important: central controlling and local management Central RepRisk-Controlling development and allocation of methods, tools and standards for the KfW group Coordination and support of local RepRisk Management Group reporting Local RepRisk-Management Identification, Evaluation and management of reputational Risk Performance of RepRisk-assessment by special experts for different stakeholders Event notification to central controlling Identification local central Reporting Evaluation local / central local Management notification local 14
Primary risk What did we find out? Reputational Risk Assessment Overview of potential reputational risk Clients (retail, SME, Financepartners/ Multiplicators stakeholder Shareholder / government Capital market/ Investoren.. Operational Risk OO O O O Reputational Risk O O O Strategic Risk O O Others O O potential reputational risks result essentially from RepRisk-Assessment operational risk (mistakes, IT-failure, law violations) or are given by the mission (carbon power plants, problematic countries) Other primary risk can also cause reputational risk High RepRisk-damage Medium RepRisk-damage low RepRisk-damage Close conjunction with management of established risk structure, because mitigation measures focus on primary risk 15
Summary Reputational Risk in promotional banks Business case is essentially given by the mission can t easily be changed Reputational risk Can result from other risk categories Can be inherent in parts of the mission (unavoidable) Mitigation measures are focused on primary risks Consist in a good communication strategie (esp. for unavoidable risks) 16
Thank you for your attention.
Photo credits/references Titel slide, slide 17: full-page image / KfW / Stephan Sperl slide 7, China; KfW-Bildarchiv / photothek.net Slide 8, KfW Photo Archive / photothek.net Slide 11; www.die-klima-allianz.de Slide 12, 16, KfW Photo Archive / photothek.net 18