bank risk management in developing economies · 6. bank marketing paradox and risks management in...
TRANSCRIPT
Bank Risk Management
in Developing Economies
Addressing the Unique Challenges of
Domestic Banks through Risk Management
Leonard Onyiriuba
ELSEVIER
AMSTERDAM • BOSTON • HEIDELBERG ' LONDON NEW YORK • OXFORD • PARIS • SAN DIEGO
SAN FRANCISCO • SINGAPORE • SYDNEY • TOKYO Academic Press is an imprint of Elsevier
Contents
Preface xxv
PART I BACKGROUND AND OVERVIEW
1. Risk, Uncertainty, and Banking Dynamics in Developing Economies
Learning Focus and Objectives 3 Expected Learning Outcomes 4 Overview oftheSubject Matter 4 Distinguishing Domestic Banks from Foreign Banks Subsidiäres 5 Realistically Distinguishing Domestic from Foreign
Subsidiär/ Banks 7 Conceptualizing and Defining Risk and Uncertainty 11 Summary 16 Questions for Discussion and Review 17 References 17 Further Readings 18
2. Perspectives on Predisposition of Banking to Risk in Developing Economies
Learning Focus and Objectives 19 Expected Learning Outcomes 20 Overview of the Subject Matter 20 Common, butVarying Intensity of, Proneness of
Banking to Risk 21 Factors of General Predisposition of Banking to Risk 25
Bank as Depositor/ for Money 25 Cash as Bank Inventory 26 Insider Infidelity and Abuse 27 Money Dealing—Staking Other People's Money 28 Tendency to Overtrading 28 Taking on Financing and the Risks of Borrowers 30 Incidence and Complexities of Banking Frauds 31 Caps in Adoption of Rules of Best Practice 33 Social Glorification of Wealth 34
Mitigating the Intensity of the Risk-Proneness of Domestic Banks 34
vii
viii Contents
Summary Questions for Discussion and Review References
PART 11 PARAD1GM SHIFT, CONCERNS, AND INSIGHTS
3. Banking Revolution, Paradigm Shift, and Risk Management in Developing Economies
Learning Focus and Objectives Expected Learning Outcomes Overview of the Subject Matter Anticipation, Buildup, and Dynamic of Revolution in Banking Welcome, Skepticism, and Concern About Banking
Revolution in Developing Economies Creation, Nature, and Dynamics of Novel Risks in Banking Revolution
Internet Fraud (General) Phishing Cybercrime Cards Fraud
Mechanisms of Novel Risks in Banking Revolution Hacking into Computers and Databases Cloning Smartcard Chips and Websites Theft of Identities of Bank Customers
Mitigating Risks of Revolution in Banking Bank Management's Roles in Novel Risks Control Customer Education Security of Bank Websites Encryption of Data and Files Adoption of Unique Banking Codes
Summary Questions for Discussion and Review References
4. Enterprise Risk Management—A Paradigm Shift and Applications in Banking
Learning Focus and Objectives Expected Learning Outcomes Overview of the Subject Matter Managing Risks in Domestic and Foreign Subsidiary Banks Life Cycle of Risk Management Process in Banking
Defining Risk Control Contexts Identifying Potential Risks Analyzing Risk Events and Issues Mitigating Impacts of Risks Monitoring and Feedback
35 36 36
39 40 40 41
46 48 48 49 49 50 50 51 52 52 53 54 54 55 56 56 57 57 58
59 60 60 61 65 66 66 66 67 67
Contents ix
ERM Concept—a Paradigm Shift and Applications in Banking 68 ERM Hallmarks and Strict Applications in Banking 71 ERM Functions and Significance in Banking 72
Builds and Broadens Risk Consciousness 72 Enhances Risk Sensitivities 72 Institutionalizes Risk Culture 73 Maximizes Opportunities 73 Anticipates Risk Events 73 Optimizes Resources 74
Summary 74 Questions for Discussion and Review 75 Reference 75
5. Strategy, Paradigm Shift, and Positioning for Business and Risk Management in Banking
Learning Focus and Objectives 77 Expected Learning Outcomes 78 Overview of the Subject Matter 78 Retail Banking Focus, Risks, and Mechanisms of Control 79 Branch Banking, Coordination, and Risks Control 81 Wholesale Banking and Mechanisms of Risk Control 85
Blue-Chip Companies 85 Private Sector Driven 85 Sales Turnover and Activities 86 Formal Organization Structure 86 Good and Focused Management 87 Realistic Business Strategy 87 Financial Accounts and Reporting 88
Cultural Issues and Prospects in Bank Positioning 88 Evolving and Sustaining Banking Culture 89 Role of Subcultural Values 90 Supplanting the Unorthodox Banking Practices 91 Survival of the Unorthodox Banking Systems 92
Summary 94 Questions for Discussion and Review 94 References 95
6. Bank Marketing Paradox and Risks Management in Developing Economies
Learning Focus and Objectives 97 Expected Learning Outcomes 98 Overview of the Subject Matter 98 Risk Control Need for Marketing in Banking 99
Customer Satisfaction 99 Growth Potential 99 Nature of Services 99 Budget Pressure 99
x Contents
Cultivation of Market 100 Competition 100
Avoiding the Pitfalls of Marketing Calls 100 Integrating Customer Needs with Marketing Goals 101 Managing Risk Through Prebanking Marketing Research Initiative 102 Cultivating Stakeholders in Banking for Marketing Risks Control 104 Mitigating Banking Risks Through Relationship Marketing 105 Internal Risk-Mitigating Information for Effective Bank Marketing 106
Bank-Related Marketing Information 107 Background Information 108 Financial Analysis and Standing 108 Branch Locations and Policies 108 International Offices and Affiliations 108 Operational Policies and Guidelines 109 Goodwill and Reputation 109
Externa! Risk-Mitigating Information for Effective Bank Marketing 109 Prospects for the Future 110 Summary 110 Questions for Discussion and Review 111 Reference 111
Section A Public Concern and Outcry
7. Risk, Safety, and the Future of Deposit Money Banks in Developing Economies
Learning Focus and Objectives 115 Expected Learning Outcomes 116 Overview of the Subject Matter 116 Safeguarding Banks Against Interrelated Risks in
Developing Economies 117 Situating Risk and Safety of Deposit Money Banks in
Developing Economies 118 Risk-Safety Divide Across Domestic and Foreign Subsidiary Banks 120 Measures of Risk and Safety of Deposit Money Banks in
Developing Economies 123 Summary 124 Questions for Discussion and Review 125 References 126
8. Money Laundering Links with Bank Risks and Management in Developing Economies
Learning Focus and Objectives 127 Expected Learning Outcomes 128 Overview of the Subject Matter 128 Meaning and Domestic-Foreign Subsidiary Banks Links 129
Contents xi
Money Laundering Dynamics and Links with Corruption 132 Corruption and Money Laundering Tendencies 134 Mechanisms of Corruption and Money Laundering 135
Economic and Business Policies vis-ä-vis Check on Money Laundering 136
Detecting and Forestalling Money Laundering in Bank Accounts 138 Know Your Customer Rules 138 Obtain Identification Evidence 139 Ascertain Nature and Level of Business 139 Establish True Identity of Customers 140 Adopt Proven Identification Process 140 Certify Identification Documents 141
Risk-Based Laws and Regulations Against Money Laundering 141 Summary 142 Questions for Discussion and Review 143 References 144
Bank Crisis, Distress Syndrome, and Failure Risk Management in Developing Economies
Learning Focus and Objectives 145 Expected Learning Outcomes 146 Overview of the Subject Matter 146 Framework for Solving Domestic Banks Crisis, Distress, and Failure 147
Historical Evidence 147 Defining the Problem 149 Discredited Practices 149 Anticipating Distress 149
Anticipating and Analyzing Domestic Banks' Distress Syndrome 149 Solving Domestic Banks' Crisis, Distress, and Failure Risks 151
Management Problems 152 Fraudulent Practices 153 Assets Deterioration 154 Poor Capitalization 154 Weak Earnings Capacity 155 Rising Cost of Funds 156 Adverse Policy Changes 156
Detecting Early Warning Signs of Domestic Banks' Distress 157 Summary 157 Questions for Discussion and Review 158 References 159
Banking Quirks, Regulatory Responses, and Supervision in Developing Economies
Learning Focus and Objectives 161 Expected Learning Outcomes 162 Overview of the Subject Matter 162
xii Contents
Banking Regulatory Authorities in Developing Economies 163 The Presidency—in Democratic Covernments 164 Central Bank of Nigeria 164 Nigerian Deposit Insurance Corporation 165
Legal Instruments and Challenges of Banking Regulation and Supervision 168
The Observed Challenges and Implications 169 Defining Issues in Banking Quirks and Regulation in
Developing Economies 170 Autonomy for Banking Regulatory Authorities 171 Albatross for Banking Supervision in Developing Economies 172 Regulatory Responses to Failing Banks in Developing Economies 173
Moral Suasion 174 Holding Actions 174 Assumption of Control 175 Acquisition, Revocation of License, or Liquidation 176
Summary 177 Questions for Discussion and Review 178 References 178
Section B New Insights and Concerns
11. Couritry Risk of Banking in Fledgling Economies Mired in Slippery Political Terrain
Learning Focus and Objectives 181 Expected Learning Outcomes 182 Overview of the Subject Matter 182 Local Populace Disillusioned with Politics 186 Ethnic Foundation of the Polities 188 Alien Political Models, Structures, and Norms 191 Military Intervention in Politics 194 Politicized Versus Apolitical Civil Service 196 Questionable, Illegitimate, and Ineffectual Regimes 198 Terrorism, Guerrilla, and Civil Wars 200 Summary 201 Questions for Discussion and Review 202 References 203 Further Readings 203
12. Public Sector Banking Analysis and Risks Management in Developing Economies
Learning Focus and Objectives 205 Expected Learning Outcomes 206 Overview of the Subject Matter 206 Significance and Business Orientation of Public Sector 207
Contents xiii
Framework of Public Sector Banking Analysis Size and Composition of Public Sector Sources of Government Revenue Government Expenditure Profile
Banking Potential of the Public Sector Role and Influenae of Public Sector Liquidity Boosting Capabilities Management of Domestic Funds Management of External Reserves Financing of Public Sector Projects
Characterizing Public Sector Banking Confidentiality of Transactions Caliber of Marketing Personnel Personal Attribute of Endurance Extensive Personal Network Routine Transactions, Traditional Products Publicity of Public Sector Transactions Irregulär Work Schedules
Summary Questions for Discussion and Review Reference
13. Bank Strategie Business Units Flannings Marketing and Risk Management
Learning Focus and Objectives 223 Expected Learning Outcomes 224 Overview of the Subject Matter 224 Meaning and Overview of Business Flanning in Banking 225 Strategy Versus Flanning for Banking Business and
Risk Management 226 Need for Clear Bank Business Flanning Directives 227 Preparation and Components of banking Business Plan 228
Executive Summary 229 Review of Previous and Current Years 230 Situation Analysis 231 Office Location 231 Business Objectives 236 Strategy Statement 237 Action Programs 239 Financial Aspects and Projections 239 Critical Success Factors 241
Presentation Problems and Tips for SBU Managers 242 Approval of Banking Business Plan 243 Monitoring and Control of Banking Business Plans 243 Summary 244 Questions for Discussion and Review 245 Reference 245
209 209 209 210 211 211 211 212 213 214 215 216 216 217 217 218 218 219 219 220 221
xiv Contents
14. Bank Governance Pitfalls, Failings, and Risk Management in Developing Economies
Learning Focus and Objectives 247 Expected Learning Outcomes 248 Overview of the Subject Matter 248 Integrating Corporate Objectives with Personal Goals 250 Tendency to Personal Governance in Banking 255
Dictatorial Chief Executives as Albatross for Banks 256 Consolidating Risk Control Resources for Bank Governance 257 Bank Members, Governance, and Stakes in Banking 259
Shareholders' Expectations 260 Bank Employees 260
Risk-Based Approach to Motivating Bank Workforce 261 Bank Managements as Risk-Bearing Corporate Leaders 262 Risk Control Lessons of Situation-Based Leadership for
Bank Managements 263 Forces in the Leader 263 Forces in the Subordinates 264 Forces in the Situation 264
Risk Control Lessons of Contingency-Based Leadership for Bank Managements 264
Summary 265 Questions for Discussion and Review 266 References 266 Further Reading 266
PART III REINVENTING RISK MANAGEMENT
Section A Credit Risk 15. Bank Credit Risk Issues and Management
Requirements in Developing Economies
Learning Focus and Outcomes 271 Expected Learning Outcomes 272 Overview of the Subject Matter 2 72 The State of Banks Lending and Credit Risk Crisis in
Developing Economies 273 Bank Credit Risk Peculiarities of Developing Economies 275
Overambitious Budget Goals 276 Turbulent Times 278
Culprits for Bank Credit Risk Crisis in Developing Economies 279 Reckless Bank Lending 279 Excessive Risk-Taking in Bank Lending 280 Illegal Lending and Credit Fraud 282 Insider Abuse 283
Contents xv
Management Structure for Bank Credit Risk Management 283 Credit Strategy Committee 283 Watch-List Committee 285
Relating Credit Risk to Bank Capitalization in Developing Economies 286 Bank Credit Risk Perspective and Implications of the
Basel Capital Accord 287 Constituents of Capital 287 Risk-Weighting System 290 Credit Risk Management Implications of the Risk-Weighting System 294
Summary 295 Questions for Discussion and Review 295 References 296
16. Bank Assets Portfolio Structure and Risk Management in Developing Economies
Learning Focus and Objectives 297 Expected Learning Outcomes 298 Overview of Subject Matter 298 Theories of Assets Management in Banking 299
The Pool-of-Funds Theory 300 Assets Allocation Model 302
Elements and Composition of Bank Assets Portfolio 304 Cash Items 304 Short-Term Funds 304 Marketable Securities 306 Investments 308 Fixed Assets 310 Loans and Advances 310
Credit Concentration and Risk Management in Developing Economies 311
Credit Portfolio Distribution, Maturity Profiles, and Risk Management 314
Summary 317 Questions for Discussion and Review 320 Reference 320
17. Sensitizing Bankers in Developing Economies to Securitization Risks and Management
Learning Focus and Objectives 321 Expected Learning Outcomes 322 Overview of the Subject Matter 322 Simplifying the Concept of Securitization 323 Objectives and Uses of Securitization 325
Unlocking Funds Tied up in Loans 325 Optimizing Income and Returns 326 Mitigating Credit Risk 327 Creating Alternative Cash Flow Source 327
xvi Contents
Managing the Balance Sheet 328 Tapping into Opportunities 329 Funding New Investments 329
The Workings and Dynamics of Loan Securitization 330 Parties to Loan Securitization 331 Documentation and Rating of Securities 333
Significance and Applications of Securitization 334 Summary 335 Questions for Discussion and Review 336 References 337
18. Credit Ratings Prospects and Practicalities for Banking in Developing Economies
Learning Focus and Outcomes 339 Expected Learning Outcomes 340 Overview of the Subject Matter 340 Meaning and Scope of Credit Rating 341 Purposes of Credit Ratings 342 Credit Scoring for Consumer Lending 343 Credit Rating Prior to Basel II—from the Perspective
of Developing Economies 344 Effect of Basel II on Credit Rating 345 Credit Rating Methods Approved by Basel II 346
Standardized Approaches 346 Internal Ratings-Based Approaches 351 Standardized Versus IRB Approaches 353
Risk Control Implications for Banking in Developing Economies 353 Summary 354 Questions for Discussion and Review 355
Section B Liquidity Risk
19. Bank Balance Sheet and Liquidity Risk Management in Developing Economies
Learning Focus and Outcomes 359 Expected Learning Outcomes 360 Overview of the Subject Matter 360 Identifying and Mitigating Bank Balance Sheet
and Liquidity Risks 361 Liquidity Demands of Risk Aversion 361 Mitigating Exposure to Systemic Risk 363 Balancing Assets Against Liabilities 363 Checking Risk in Funding Assets 364 Relating Credits and Deposits Terms 364 Insights into Loan to Deposit Ratio 365
Contents xvii
Solving Bank Capitalization-Induced Balance Sheet and Liquidity Risks 365
Regulating and Measuring Adequacy of Bank Capitalization 366 Startup or Base Capital 367
Bank Liquidity Issues, Measures, and Risk Management in Developing Economies 368
Loan-to-deposit Ratio 368 Cash Reserve Ratio 372 Liquidity Ratio 372
Summary 376 Questions for Discussion and Review 377 Further Readings 377
20. Bank Liabilities Portfolio and Liquidity Risk Management in Developing Economies
Learning Focus and Objectives 379 Expected Learning Outcomes 380 Overview of the Subject Matter 3 80 Conceptualizing Liquidity in the Context of Banking 381 Meaning of Liquidity 383 Liquidity of Assets 383 Liquidity of a Bank 385 Measuring Liquidity of a Bank 385 Integrating Cashflow with Mitigation of Bank Liquidity
and Funding Risks 386 Spreadsheet Applications in Bank Liquidity and Funding
Risks Management 388 Inputfrom Financial Control Input 390
Liabilities Generation and Build-Up as Bank Funding Strategies 392 Deposit 392 Demand Deposit Account 393 Savings Deposit Account 394 Time Deposits 395 Float-Oriented Account 395
Monitoring and Staving off the Factors of Liabilities Portfolio Risks 396
Summary 398 Questions for Discussion and Review 399 Reference 399 Further Readings 399
21. Bank Liquidity Crisis and Funding Risk Management in Developing Economies
Learning Focus and Outcomes 401 Expected Learning Outcomes 402 Overview of the Subject Matter 402
xviii Contents
Regulatory and Theoretical Challenges of Bank Liquidity Management 403
Commercial Credit and Lending Perspectives on Bank Liquidity Risk 404
Import of Self-Liquidating Loans 405 Limitations and Implications 406 Neglect of Needs of Growing Economies 406 Fallacy of Self-Liquidating Loans 406 Possible Stability of Deposit Base 407 Irrelevant Düring Business Lull 407
Switching Assets in Grappling with Challenges of Bank Liquidity 408 Eligibility of Securities 408 Merits and Demerits of Asset-Switching 409
Anticipating Income from Loans to Mitigate Bank Liquidity Risk 409 Shortcomings and Criticisms 410
Liability-Management Liquidity Theory—Evolving Issues and Perspectives 411
Shortcomings and Implications 412 Bank Treasury Crisis in Developing Economies 412 Management Structure for Bank Liquidity Risk Management 413
Executive Committee 414 Credit Strategy Committee 414 Assets and Liabilities Committee 415
Summary 416 Questions for Discussion and Review 417 References 418 Further Reading 418
22. Macroeconomic Challenge of Liquidity Risk for Banking in Developing Countries
Learning Focus and Objectives 419 Expected Learning Outcomes 420 Overview of the Subject Matter 420 Macroeconomic Management Issues in Developing Economies 421 Monetary Policies Bearing on Banking Risks and Control 423
Monetary Policy Goals and Controls 424 Bank Risk Fallout of Indirect Instruments of Monetary Policy 426
Open Market Operation 426 Meaning and Purpose 426 Differentiating OMO markets 427 Major OMO Participants 427 Instruments of OMO Transactions 428 Procedura for OMO Dealing 428 Significant OMO Benefits 429 Risk Implications of OMO for Banks 429 Reserve Requirements 430 Discount Window Operation 431 Moral Suasion 431
Contents xix
Bank Risk Implications of Direct Instruments of Monetary Policy 432 Debt Bürden, Crisis, and Fiscal Policy Impact on
Banking Risks and Control 432 Quality and Applications of Borrowing 432 Rethinking the Purpose of Borrowing 433 Suspect Criteria of Lending to Government 434 Revisiting the Causes of Foreign Borrowing 435
Market Liquidity Determinants and Interest Rate Risk in Banking 435
Summary 437 Questions for Discussion and Review 438 References 439
Section C Market Risk
23. Market Risk, Interest Rates and Bank Intermediary Role in Developing Economies
Learning Focus and Objectives 443 Expected Learning Outcomes 444 Overview of the Subject Matter 444 Assessing the Role of Banks as Intermediaries in Financial Markets 445 Concepts and Applications of Market Risk in Banking 447
Interest Rate Risk 448 Foreign Exchange Risk 448
Situating Market Risk of Banking in Volatile Sources and Cost of Funds 449
Factors Underlying Market Risk in Banking 450 Size of Capital Funds for Banking 450 Risk-Return Trade-Off 451 Deposits Liabilities Base 451 Monetary Policies and Control 452 Prevailing Economic Conditions 453 Regulatory Maneuverings 453
Market Risk Fallout of Flaws in Monetary Policy and Management 454 Summary 456 Questions for Discussion and Review 456 References 457
24. Foreign Exchange Markets and Triggers for Bank Risk in Developing Economies
Learning Focus and Objectives 460 Expected Learning Outcomes 460 Overview of the Subject Matter 461 Background to Foreign Exchange Intricacies in
Developing Economies 462 Foreign Exchange Management Process and Policy Implications 463
Contents
Foreign Currency Markets and Risk Management 468 Forms of Foreign Currency Markets 468 Central Bank (Interbank) Market 468 Autonomous Market 469
Market Deals, Process, and Risk Management 469 Spot Transactions 470 Forward Contracts 470 Swap Deals 472 Option Deals 472 Interbank Placements 473
Interbank Dealing Process, Risks, and Management 474 Primary Dealing Rules 474 Mode of Trading 474 Two-ways Quoting System 474 Dealer's Word is Their Bond 475 Conti rmation of Deals 475 Elements of Transactions 475 AmountTraded 475 Settlement Risk 476 Currencies and Rates Quotes 476
Dealing Arrangements and Risk Management 476 FX Commitments and Margins 477 Value-dating Deals 477 Determining Spreads 477 Obligation to Quote 478 Settlement of Deal 478 Default and Remedial Action 478 Rights and Obligations of the Dealers 479
Foreign Exchange Risks Beckoning for Banks in Developing Economies 479 Challenge of Autonomous Markets for Bank FX Risks Management 481 Summary 483 Questions for Discussion and Review 484 References 484 Further Readings 485
Money Market Workings, Instruments, and Bank Risk in Developing Economies
Learning Focus and Objectives 488 Expected Learning Outcomes 488 Overview of the Subject Matter 488 Defining and Characterizing Money Markets in
Developing Economies 489 Major Money Market Players in Developing Economies 491
Central Bank 491 Authorized Dealers 492 Nonbank Financial Institutions 492 Deposit Insurance Corporation 492 Importers 493 Exporters 493
Contents xxi
Borrowers in Dornest!c Currency 493 Depositors in Domestic Currency 494 Speculators 494 Sundry Other Participants 494
Domestic Currency Instruments of Money Markets 494 Cash and Short-Term Funds 495 Treasury Deposits and Certificates 495 Interbank Placements 496 Treasury Bills 496 Open-Buy-Back 497 Repurchase Agreement 497 Central Bank's Advances to Banks 498 Credit Products and Facilities 498 Commercial Bills and Acceptances 498 Commercial Papers 498 Bankers' Acceptances 499 Bank Cuarantee 500
Foreign Currency Instruments of the Money Market 501 Domiciliary Accounts 501 Export Proceeds 501 Government FX Funds 502 Personal FX Funds 502 Foreign Currency Loans 502 Letters of Credit 503
Dealing Procedures, Terms, and Risk Management 504 Accreditation of Dealers 504 Standard Dealing Hours 504 Dealing Procedure 504 Mode of Communication 504 Currency for Trading 505 Amounts Traded 505 Tenor of Transactions 505 Deals Confirmation Process 505 Delivery of Instruments 506 Settlement of Deal and Risk 506 Notice of Termination of Transaction 506 Termination of Transaction 507 Rollover of Transactions 507 Disputes and Misunderstandings 507
Summary 508 Questions for Discussion and Review 509 Reference 509
26. Capital Market Dynamics, Securities, and Bank Risk in Developing Economies
Learning Focus and Objectives 511 Expected Learning Outcomes 512 Overview of the Subject Matter 513 Defining and Appreciating the Significance of Capital Markets 513
xxii Contents
Characterizing Capital Markets in Developing Economies 515 Primary Market 515 Secondary Market 515 Bonds Market 516 Distinguishing Features of Bonds 517
Major Players and Participants in Capital Markets in Developing Economies 518
SEC, Market Regulation, and Risk Management 519 Stock Exchange—Investor Watch Dog and Hub of
Transactions in Securities 520 Domestic Currency Instruments of the Capital Market 524
Ordinary Shares 524 Preference Shares 524 Debenture Stocks 525 Equity Versus Debt as Domestic Currency Instruments 525
Foreign Currency Instruments of the Capital Market 526 FX Futures Contract 527 Differentiating Futures from Option 528 Comparing Futures with Forward Contracts 529
Boom to Bust Mechanisms of Capital Market Risks in Developing Economies 530
Summary 532 Questions for Discussion and Review 533
Section D Operational Risk
27. Bank Operational Risk Dynamics and Management in Developing Economies
Learning Focus and Objectives 537 Expected Learning Outcomes 538 Overview of the Subject Matter 538 Defining Operational Risk and its Applications in Banking 539 Nuances of Operational Risk Dynamics and Interactions 543
Industry and Operational Risk Interaction 543 (nteraction Between Business and Operational Risk 543 Linking Financial Risk with Operational Risk 544 Market Risk Interface with Operational Risk 544
Interface Between Liquidity and Operational Risk 546 Summary 546 Questions for Discussion and Review 547 Reference 547
28. Bank Work, Employees, and Operational Risk Management in Developing Economies Learning Focus and Objectives 549 Expected Learning Outcomes 550
Contents xxiii
Overview of the Subject Matter 550 Operational Risk in Negative Work Disposition 551 Pressure of Work vis-ä-vis Operational Risk in Banking 552 Operational Risk in Lack of Enthusiasm for Work 554
Disturbing Family Pressures 555 Upset of Personal Goals 555 Low Work and Service Morale 556 Dissatisfaction with Work 556 Loss of Faith in Seif and Employment 557
Risk-Determining Interface Between Business and Operations Banking 558
A Split Spurred by Risk Considerations 558 Pacing up to Risk and Disabusing Employees of Notions of Blas 560 Taming Business Banking with Risk-Based Controls 562 Risk-Based Approach to Em power Business Managers 564 Managerial Response to Employee Situations 565 Handling Difficult Employees and Customers 566 Summary 566 Questions for Discussion and Review 567 Reference 568
29. Banking Processing and Operational Risk Management in Developing Economies
Learning Focus and Objectives 569 Expected Learning Outcomes 570 Overview of the Subject Matter 570 An Insight into Operational Risks of Banking in
Developing Economies 571 Operational Risks in Banking Transactions Processing 573
Errors and Risks in Transactions Processing 574 Usual Causes of Processing Errors 576 Measuring Transactions Processing Errors 577 Effects of Transactions Processing Errors 578 Control of Transactions Processing Errors 579
Risks and Controls in Paying and Clearing Checks 581 Checks Lodged in Savings Account 582 Crossed Check Paid Over-the-Counter 582 Honoring Stopped Check 582 Non or Wrong Confirmation of Check 582 Non or Wrong Verification of Signature 582 Paying Third Party Check 582 Releasing Checkbook to a Third Party 583 Suppression of Check 583 Unauthorized Access to Account Balance 583 Wrong Sorting of Checks 583
Stemming Operational RisksThrough Reconciliation of Accounts 583 Interbranch Accounts 584 Call-Over of Transactions 584
xxiv Contents
Control or Mirror Accounts 584 Mirror Account 584 Nostro Account 585 Vostro Account 585 GL Reviews and Proofs 585 Vault Cash 586
Summary 586 Questions for Discussion and Review 587
30. Banking Frauds and Operational Risk Management in Developing Economies
Learning Focus and Objectives 590 Expected Learning Outcomes 590 Overview of the Subject Matter 590 Defining Fraud and its Connotations in Banking 591 Insights Into Fraud-Driven Operational Risk in Banking 593 Tracing the Root Causes of Frauds in Banking 594
Society and Negation of Moral Values 594 Upbringing, Background, and Lifestyle 594 Internal Bank Workings and Controls 595 Dysfunctional Legal Frameworks 595
Dynamic and Psychology of Banking Fraud 596 lnside Job—Characteristics, Dynamic, and Stakes 597 Fraud From the Outside—First Principles and Build-Up 598 Collusion for Fraud—Enlisting Connivance of an Accomplice 599
Profiling Banking Fraudsters and Putting Their Acts Into Perspective 600 Lone Fraudster 601 Fraud Syndicate 601 Fraud Accomplices 603
Deciding and Applying Instrument of Fraud 604 Dealing with Frauds in Banking—an Administrative Emphasis 607
Current Approaches to Fraud Control 608 Regulär Fraud Control Measures 608 Supplementary Inputs into Fraud Control 608 Integration of Ancillary Fraud Control Measures 609 Complementary Approaches to Fraud Control 610 Reinventing Bank-Employee Organic Relationship 610 Evolving a Workable Solution to the Scourge of Frauds 611 Risk Management Implications of the Complementary Approaches 611 Weifare and Compensation Packages 612 Motivation of the Employees 612 Fair Treatmentof the Employees 612 Equitable Employees Reward System 613 Making Career in Banking Pensionable 613
Summary 613 Questions for Discussion and Review 614
Index 617