principles of risk management - nacha 109... · – many recent failures were liquidity driven . 13...

THE PAYMENTS INSTITUTE — July 20-23, 2014 Emory Conference Center Hotel, Emory University, Atlanta, Georgia

Norman Robinson, AAP

President & CEO

EastPay, Providing Payments Expertise®

Principles of Risk Management

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Agenda

• Risk management terminology and concepts

• The risk management lifecycle • Define risk categories and elements • Define enterprise or operational risk • Define cross-channel risk • Review • Discussion

• Understand and recognize the elements of risk, including strategic, liquidity, reputational, fraud, credit, transactional, compliance, operational, cross channel)

• Understand how these risk elements apply

across payment channels

Learning Objectives

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Five Steps to Risk Management 1. Identify and understand your major risks

2. Decide which risks are natural

3. Determine capacity and tolerance for risk

4. Embed risk in all decisions & processes

5. Align strategies and the organization around risk

Risk

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Payments Used to be simple

Banking Circa 1970

Cash

Checks Wire Transfer

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Payments are now more complex

Banking Circa 2014

Cash

Checks

Wire

Transfer

ATM’s

Debit Cards

Credit Cards

ACH

Remote Deposit

Virtual

Mobile

Risk Categories

1. Financial Risks

2. Management Risks

3. Operational Risk

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1. Financial Risks

• Interest rate – Deposit terms and rates

• Price – Non-interest income

• Liquidity – Deposit operations fund the bank

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Interest Rate

• Asset Liability Committee (ALCO) in place • Assets = ? • Liabilities = ? • Spread • Impact on earnings today? • Impact on earnings next year? • Stress tests • Emphasis on Capital

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Financial Risks

Pricing

• Direct impact on earnings • Missed opportunities • FI’s philosophy • Customer relations • Market relevance • Regulatory intervention

– Overdraft programs – Durbin amendment – Dodd-Frank Amendment 1073 – CFPB

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Financial Risks

Liquidity

• Deposit operations provide the overwhelming majority of funding for loan operations

• Interest rates and pricing impact liquidity • Critical to success of the bank

– Many recent failures were liquidity driven

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Financial Risks

2. Management Risk

• Strategic risk – Technology as an example

• Credit – Deposit operations

• Reputation – Customer service

• Business/Legal – Contracts/Agreements

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Strategic Risk

• Flawed or failed strategies • Deployment of technology • Impact on financial performance • Bleeds over into other risks or directly

impacts them – Data breaches – Reputation risks

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Management Risk

Credit Risk

• The obvious • The not-so-obvious • Broad implications for

– Deposit operations – Wire transfer – ACH origination

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Management Risk

Reputation Risk

• Probably the hottest topic today • Not only who you are but who you do

business with • Loss of customer confidence • Impact on earnings • Loss of shareholder values

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Management Risk

Business/Legal Risks

• Risk of opening the doors – Physical security falls into this category

• Proper policies • Internal controls • Procedures • Documentation • Contracts & Agreements

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Management Risk

3. Operational Risk

• Transactional – Billions of transactions daily

• Compliance

– The cost of not complying

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Transactional Risk

• Sheer volume of transactions • Multiple points of entry into legacy

systems • Internal controls • Disaster recovery • Contingency planning

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Operational Risk

Compliance Risk

• Regulatory compliance – Alphabet soup including Reg CC and Reg E – OFAC – AML/BSA

• Legal compliance – UCC 3 & 4 including Check 21 – UCC 4a - wire transfer

• Network compliance – Pulse/VisaNet/Maestro/Star/Others – ACH Operating Rules

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Operational Risk

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What is Enterprise Risk? • Risk of loss across the entire financial institution

resulting from inadequate or failed controls relating to: – Internal processes – People – Systems – External Events

• “Operational risk is embedded in virtually every activity a financial institution engages in, from check processing to trading activities, and the more complex the institution or process, the greater the risk of operational failure.”

• Thomas Curry, Comptroller of the Currency, March 4, 2013

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Examples • Internal fraud • External fraud • Customer or client interactions • Financial products • Business practices • Damage to physical plant • Business interruption • System failures • Execution and delivery of commitments • Process management • Employment practices • Workplace safety

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Manifestations

• Failures of: – Manual processes – Automated processes – Interaction of processes with faulty data

• One time events • Cascading of multiple failures over time

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Key Decision

• How to allocate capital to operational risk

• Challenge: – Operational risk has no naturally occurring

monetary measurement; therefore, – No profit incentive exists to effective motivate

increased efforts to reduce operational risk – Ergo: justifying “up” is very difficult

Cross-Channel Risk

Risk associated with deposit accounts by way of multiple points of access —branch, ATM, call

center, debit card, online banking, check, ACH, wire, etc., or the presence of multiple risk types.

• Legal • Reputational • Operational • Compliance • Fraud • Liquidity

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Cross-Channel Risk and Account Takeover

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Regulator Statement… “…Thomas J. Curry, the head of the OCC, stated that although asset quality has improved, charge-off rates have fallen, and capital now stands at its highest level in a decade, another type of risk is gaining increasing prominence; Operational Risk. In fact, the OCC considers it currently to be at the top of the list of safety and soundness issues for the institutions they supervise. Furthermore, because the implications of operational risk extend to all other risks….“Management should distinguish the operational risk component from other risks to enable a stronger focus on operational risk mitigation.“

Source: Compliance Guru, July 2012

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$17million Embezzlement

• Allegedly Defrauded More Than 100 Investors

• $17million Unaccounted For

• Bank Closed by FDIC

• No Controls to Monitor “Investments”

Source: CNN July 2012

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What can criminals do if they access your Online Banking credentials?

Answer:

Anything you can do • Drain Funds

• ACH

• Checks

• Wires

• Consumer & Business

Account Takeover

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Account Takeover

Criminal Victim’s Computer

Harvested Data: • OLB Info • Challenge

Questions

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Account Takeover Realities

• Stolen credentials, not weakness of Online Banking

• Matter of when a business network is infected, not if

• Even strong security can be bypassed

• Significant losses & damaged reputations

• Attacks will continue to get worse

• Typically learn of network intrusion when accounts are compromised

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Account Takeover Red Flags File or Wire Exceeds Exposure Limits

Unusual log-in activity (failed attempts, etc)

Transactions on unusual days or multiple transactions in short

period of time

Unusual Activity (Wires vs ACH, 2 ACH Files in 1 day, etc)

Report of unauthorized activity

New Admin Credentials created

Report from Users their authority was changed 33

Mitigation How to avoid potential loss

Origination calendars

Reasonable exposure limits

Client education

Static IP or IP address authentication

Layered security

Behavioral analytics and/or transaction analytics

Out of Band Authentication

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ODFI Actions

Terminate or suspend access

Contact the RDFIs

Request R06 returns

Have Originator submit files other ways

Utilize ACH Operator risk monitoring service

Account takeover doesn’t always mean infected computer

Have an Action Plan / Incident Response Plan

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• Understand and recognize the nine elements of enterprise risk (strategic, liquidity, cross channel, reputational, fraud, credit, transactional, compliance, operational)

• Understand how these risk elements apply across payment channels

Learning Objectives

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Discussion

Questions

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