Challenges in Risk Management

Tuesday, 10 June 2014 00:41 -     - {{hitsCtrl.values.hits}}

  • First ever seminar on risk management for banking sector kicks off
  • Will feature five eminent speakers from South Asia to share their perspective on Basel III guidelines
By Shabiya Ali Ahlam The global economy in 2013 was marked with unprecedented regulatory scrutiny, the rising importance of reputation, market volatility, and new risks posed by mobility. In that scenario today, for banks of all sizes, it is observed that the challenge of building governance, strong risk management programs and a risk compliance-focused culture remains daunting. With the situation being no different in Sri Lanka, the Association of Banking Sector Risk Professionals Sri Lanka (ABSRP) organised a comprehensive seminar ‘Risk Symposium 2014’ – the first of its kind to be held to address the subject of risk in the banking sector. Held over two days, the conference that kicked off last evening and will continue today is held under the theme ‘Challenges in Risk Management – A Basel Perspective’. The conference will give special emphasis on Basel III. The two day event which will present five eminent speakers featured as chief guest Central Bank Director of Bank Supervision Yvette Fernando. Making a presentation at the inauguration session was also Ernst and Young (E&Y) Philippines Partner Francisco Lumbres who shared insights on Basel III, key changes and its impact, focus areas and how global banks are responding to the guidelines. Basel III, also known as the ‘Third Basel Accord’ is a global voluntary regulatory standard on bank capital adequacy that stresses on testing and market liquidity risk. It was agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11 and was scheduled to be introduced from 2013 until 2015. However, changes from 1 April 2013 extended implementation until 31 March 2018. The third instalment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the late 2000s financial crisis. While risk management is relatively a contemporary subject in the local domain, amongst banks formal frameworks governing this concept started to take shape in the year 2009, leading to the implementation of the risk management frameworks to be challenge for not only banks, but for regulators as well. Addressing the inauguration ceremony of the conference, ABSRP President Sanath Manatunge said: “This task became more challenging with the rapid transformation of the Basel Guidelines. I believe that our symposium would be beneficial for all participants who will eventually be stakeholders in the journey to the implementation of Basel III practices in Sri Lanka.” Risk management as a process Noting that risk management is a process, CB Director Fernando pointed out that it is a process that attempts to identify, measure and monitor and manage any credit risk. Ad in any bank risk management is seen in many levels which can be identified broadly as institutional, regulatory and market level. These levels when put together will ensure a safe and sound banking and financial systems, she said. Risk management at institutional level While at the institutional level risk management is that of the bank itself, Fernando noted it is the first line of defence against future shocks of the financial systems. “Risk management at institutional level should ideally start at the top most level of an organisation, which is the board of directors. The primary role of the board of directors is not just simply to oversee the executive management activity. It should play an active role and should work alongside the management to deal with risk issues. It should not wait till such issues in this regard are reported to the board,” asserted Fernando. While one way to get about this issue cannot be laid out, it is necessary for each role that is best fit for the institution to be identified and recognised. For this it is important that the board and the senior management work together so that they will build on a risk intelligent organisation. “The board should not get involved in day to day operations but it should take over the oversight function. It should have a risk mitigating committee that should work toward corporate governance directions. This is a vehicle that the board can facilitate to get information. They should satisfy themselves that the risk management process designed and implement by risk managers are adapted to the board strategies and functioning as directed and that necessary steps are taken to foster a good risk culture in the organisation,” she noted. While it is expected that all activities should be governed by certain policies and procedures, such have to be documented and should be approved by the board, and it is imperative they be aware of the risk appetite and also should know how risks are mitigated. “It is not just the policy and procedure since we’re operating in changing times. These policies need to be reviewed and updated in changing circumstances. Though this is an oversight role, the board can also communicate to the corporate risk management that it is not an impediment to the conduct of business. This is imperative that the risk management is not looked at as an impediment. It is also not to supplement the banks overall compliance work, but it is an integral component of bank strategies, culture and value generation process,” emphasised Fernando. Risk management at a structural level While on the structure a particular model cannot be followed, there are key principles that make risk management independent. “It should not be with the business line. The board should decide if there is going to be a separate division or department, but it is essential that the independent risk management function operating depending on the requirement of the specific institution,” advised Fernando. Risk management a regulatory level On the regulatory level, the Central Bank specifies that all banks maintain minimum requirement levels. However, that does not limit the banks to comply with these specifications alone. While they have to comply with the minimum, they can go beyond. “We (Central Bank) issue the minimum requirement by looking at the local and global circumstances and best practices, and try to adapt what is appropriate to our banking sector. While the banks should comply with these minimum standards, they can go a few steps ahead,” she said. Risk management at market level At the market level there are lots of disclosures required not only by the regulators, but also other groups such as external auditors who will perform certain function, shareholders and customers who will review these disclosures and make certain decisions. Noting that banks need to always be conscious of risk management and not think they are fully compliant thus can take matters easy, Fernando said: “It is important for us to think about how interconnected our organisations are with the real economy and other market players. We should use these interconnection to strength our risk management systems.
  • "The Association of Banking Sector Risk Professionals (ABSRP) was formed in early 2012 to share best practices and strengthen fellowship amongst risk professionals of all commercial banks in Sri Lanka, with a common interest to create a resilient banking sector in the country.
  • The symposium organised by the ABSRP for the first time, and in partnership with Aptivaa, Bartleet Transcapital and Suriya Software is part of ongoing educative initiatives of the ABSRP, and aims to familiarise participants with the recent Basel III regulatory developments and compliance requirements. Basel III – the latest instalment of the Basel Accords is intended to support capital growth and strengthen balance sheet liquidity and make the banking sector more resilient to economic shocks"
“We should also develop proper attitude towards risk and returns. We should not take the small time profit or the small time advantage at the cost of suffering the long term sustainability.” The technical sessions, that will continue today, will consists of presentation from ICRA Mgt. Consultants India Chief Operating Officer V. Sriram who will speak on ‘Optimising Capital Requirements Under Basel’, Aptivaa  Consulting Solutions Chief Operating Officer & Principal Sandeep Mukharjee who will address the topic ‘Stress Testing: Regional Best Practices’, KPMG India Partner Financial Risk S. Kuntal who will speak on ‘Liquidity, Leverage & Capital Buffers of Basel III’,  and HSBC Hong Kong Senior Manager  Asset, Liability and Capital Management Ashantha Silva who will talk on ‘Liquidity & Funding Risk in a Basel III World’. The conference will conclude with a panel discussion moderated by KMPG Sri Lanka Managing Partner Reyaz Mihular, which will feature all five speakers, including CB Director Fernando to interact with the audience. Pic by Upul Abayasekara