enterprise risk management: balancing threats and profitability (credit union conference...

22
National Association of Federal Credit Unions l www.nafcu.org Enterprise Risk Management: Balancing Threats and Profitability Presented by Radu Miclaus SAS Institute, Inc.

Upload: nafcu-services-corporation

Post on 25-Dec-2014

415 views

Category:

Business


1 download

DESCRIPTION

Enterprise risk management is not just a process credit unions utilize to mitigate and manage the negative consequences of normal business operations, it is a practice of balancing risk and profitability. By understanding and managing the critical uncertainties that affect day-to-day business, credit unions can execute the proper strategies to achieve their performance goals in a post-financial crisis era. In this 2011 NAFCU Annual Conference session you learn how to apply ERM to your corporate strategies, assure management that risks are properly identified and balance risk management and business objectives. Presented by Radu Miclaus, Senior Analytics Solution Architect, SAS Institute, Inc. More info at http://www.nafcu.org/sas

TRANSCRIPT

Page 1: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Enterprise Risk

Management: Balancing

Threats and Profitability

Presented by

Radu Miclaus

SAS Institute, Inc.

Page 2: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

“amat victoria curam”

Victory likes careful preparation. (Anonymous)

Page 3: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org 1980s

Credit

Interest Rate

Financial

Risk Management

1990s

Credit

Transactional

Enterprise

Risk Management

Credit

1970s

Credit

Risk Management

Compliance

Op

eratin

g

Liquidity

Ma

rket

Interest Rate

Liquidity

Ma

rket

Strategic

Reputation

Evolution of Industry Best Practices in ERM

Page 4: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Real Measures, Real Dollars

• Reduce Charge-Offs: 1%↑ earnings

• Risk-based Pricing: 1 to 2%↑ earnings

• Streamlined Underwriting Processes: 0.5 to

1%↑ in earnings

• Mitigating Operational Losses: 1 to 2%↑ in

earnings

Page 5: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Regulatory Incentives

• Identifies and measures all material risks

• Relates capital to risk levels (cushion)

• States capital adequacy goals to risk (Management)

• Assesses conformity to our stated risk objectives (Board involvement)

Page 6: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

ERM Reflects the Paradigm Shift

• Fragmented

• Ad hoc

• Narrowly focused

• Integrated

• Continuous

• Broadly focused

Old Paradigm New Paradigm

Key: Level of Sophistication

Page 7: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Sophisticated Competitors Create

Competitive Inequality

• “Right” price all members

– Lower pricing on least risky/profitable members

– Higher pricing on most risky members

• Better pricing/servicing to their best members…

• …and to yours

Page 8: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Regulatory versus Economic Capital

•Role of capital

– Institutions should have sufficient capital to protect themselves and their depositors from the risks (credit/market/operational) they are taking.

•Regulatory capital

– Amount of capital an institution should have according to a regulation (for example, Basel I or Basel II)

•Economic capital

– Amount of capital a bank has based on internal modeling strategy and policy

•Types of capital:

• Tier 1: common stock, preferred stock, retained earnings

• Tier 2: revaluation reserves, undisclosed reserves, general provisions, subordinated debt (can vary from country to country)

• Tier 3: specific to market risk

Page 9: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Benefits of Sophistication

• Regulators: Better, Improved CAMEL

ratings

• Ratings Agencies: Cost/Availability of

Funds

• Insurance Companies: Insurance

Premiums and Coverage

(We are judged by our Oversight and Controls)

Page 10: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

How Do We Get that Level of

Sophistication?

• Borrow Industry Best Practices

– People

– Technology

– Processes

• Get Public Information

10

Page 11: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org 1980s

Credit

Interest Rate

Financial

Risk Management

1990s

Credit

Transactional

Enterprise

Risk Management

Credit

1970s

Credit

Risk Management

Compliance

Op

eratin

g

Liquidity

Ma

rket

Interest Rate

Liquidity

Ma

rket

Strategic

Reputation

Evolution of Industry Best Practices

Page 12: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Credit

People

• Business Analysts

• Underwriting Background

• Statistical Background (novice-expert)

Technology

• Predictive Modeling

• Simulation (VaR)

• Reporting (multidimensional)

Processes

• Account level risk profiling (credit rating system)

• Loan portfolio level outcome simulation

• Stress Testing

• Healthy Capital Structure

Page 13: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Credit Risk Analytics (Example)

Credit Unit A is aiming to reduce bad credit charge-offs,

and improve the process of reserving and capital

structure.

Acc

ou

nt

• PD, LGD, EAD (Data Mining)

• Credit Scorecards

• Credit Rating (IRB)

Port

folio

• Stress Testing (application and

macroeconomic factors)

• Exposure Simulation (50-th

percentile vs. 99-th percentile)

• Define Policy and Thresholds

Page 14: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Market

People

• Business Analysts

• Investment Background

• Statistical Background (novice-expert)

Technology

• Forecasting

• Simulation (VaR)

• Performance Reporting (multidimensional)

Processes

• Performance Monitoring

• Asset allocation based on risk profile

• Stress Testing

• Healthy Capital Structure

Page 15: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Market Risk Analytics (Example)

Credit Unit A is aiming to improve portfolio

performance through investment policy in order to

better meet profit goals and buffer capital structure

Inst

rum

ent

• Instrument/Position Level

Exposure Calculation (MTM)

• Pricing functions

• P/L curve/ Surfaces

• Performance Monitoring

Port

folio

• Stress Testing (based on risk

factors- pricing and macro)

• Exposure Simulation (50-th

percentile vs. 99-th percentile)

• Define Investment Policy and

Thresholds

Page 16: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Operational

People

• Business Analysts/ Risk Managers

• Business Unit experience

Technology

• Integrated data collection and process management

• Performance Reporting (multidimensional)

• Simulation (VaR)

Processes

• Centralized Approach

• Awareness and Mitigation Action

• Outcome Simulation

• Healthy Capital Structure

Page 17: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Operational Risk/ EGRC (Example)

Credit Unit A is aiming to improve the operational environment

through increased awareness of risk pockets and better actions

plans for mitigation and planning

Bu

sin

ess

Un

it

Cap

ital

• Event Modeling at BU level

• Exposure aggregation by BU

and Risk Type

• Capital Allocation

• Centralized data

collection/reporting

• Centralized/Streamline

process management

• Ownership and

Awareness

Page 18: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Not an Initiative or a Culture Change

• It’s a New Way of Life

• It’s a Shift in Thought (not in culture):

Everyone is a risk manager, not just the

CRO

• Nurture the entrepreneurial spirit and take

calculated risks

• It’s both Art and Science

Business Acumen

Analytics

Goal Achievement

Page 19: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Art and Science

“This, ultimately, is what risk management

and decision-making are all about and where

the balance between measurement and gut

becomes the focal point of the whole story.”

--Peter L. Bernstein

Against the Gods:

The Remarkable Story of Risk

Page 20: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

NCUA’s Risk Categories and Risk Indicators

CREDIT RISK FACTORS:

Low Medium High

Board and Operational Management Understanding

Fully understands all aspects…

Reasonably understands key aspects…

Does not understand risks…

Etc.

INTEREST RATE RISK FACTORS:

Low Medium High

Board and Operational Management Understanding

Fully understands all aspects…

Reasonably understands key aspects…

Does not understand risks…

Etc.

Art or Science?

From NCUA Letter No.: 02-FCU-09

Page 21: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Final Thought….

Analytics

Business Acumen

Goal Achievement

• Awareness • Expectations

• Decisions • Executions

Page 22: Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

National Association of Federal Credit Unions l www.nafcu.org

Any Questions?

[email protected]

(919) 780-8193