Enterprise RiskManagement: BalancingThreats and Profitability          Presented by         Radu Miclaus        SAS Instit...
“amat victoria curam”Victory likes careful preparation. (Anonymous)           National Association of Federal Credit Union...
Evolution of Industry Best Practices in ERM                                                                        Enterpr...
Real Measures, Real Dollars• Reduce Charge-Offs: 1%↑ earnings• Risk-based Pricing: 1 to 2%↑ earnings• Streamlined Underwri...
Regulatory Incentives• Identifies and measures all material risks• Relates capital to risk levels (cushion)• States capita...
ERM Reflects the Paradigm Shift Old Paradigm                                    New Paradigm• Fragmented                  ...
Sophisticated Competitors Create       Competitive Inequality• “Right” price all members  – Lower pricing on least risky/p...
Regulatory versus Economic Capital•Role of capital    – Institutions should have sufficient capital to protect themselves ...
Benefits of Sophistication (We are judged by our Oversight and Controls)• Regulators: Better, Improved CAMEL  ratings• Rat...
How Do We Get that Level of              Sophistication?• Borrow Industry Best Practices  – People  – Technology  – Proces...
Evolution of Industry Best Practices                                                                        Enterprise    ...
Credit     People                        Technology                                   Processes• Business                 ...
Credit Risk Analytics (Example)    Credit Unit A is aiming to reduce bad credit charge-offs,    and improve the process of...
Market     People                        Technology                                   Processes• Business                 ...
Market Risk Analytics (Example)    Credit Unit A is aiming to improve portfolio    performance through investment policy i...
Operational     People                           Technology                                   Processes• Business         ...
Operational Risk/ EGRC (Example)      Credit Unit A is aiming to improve the operational environment      through increase...
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 ri...
Art and Science “This, ultimately, is what risk managementand decision-making are all about and where the balance between ...
NCUA’s Risk Categories and Risk Indicators CREDIT RISK                        Low                           Medium        ...
Final Thought…. • Awareness                   Analytics• Expectations                                                     ...
Any Questions?       Radu.Miclaus@sas.com          (919) 780-8193 National Association of Federal Credit Unions l www.nafc...
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Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

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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

Published in: Business, Economy & Finance
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Enterprise Risk Management: Balancing Threats and Profitability (Credit Union Conference Presentation)

  1. 1. Enterprise RiskManagement: BalancingThreats and Profitability Presented by Radu Miclaus SAS Institute, Inc. National Association of Federal Credit Unions l www.nafcu.org
  2. 2. “amat victoria curam”Victory likes careful preparation. (Anonymous) National Association of Federal Credit Unions l www.nafcu.org
  3. 3. Evolution of Industry Best Practices in ERM Enterprise Risk Management Reputation Operating Strategic Financial Compliance Risk Management Transactional Market Liquidity Liquidity Market Credit Risk Management Interest Rate Interest Rate Credit Credit Credit 1970s 1980s 1990s National Association of Federal Credit Unions l www.nafcu.org
  4. 4. 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 National Association of Federal Credit Unions l www.nafcu.org
  5. 5. 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) National Association of Federal Credit Unions l www.nafcu.org
  6. 6. ERM Reflects the Paradigm Shift Old Paradigm New Paradigm• Fragmented • Integrated• Ad hoc • Continuous• Narrowly focused • Broadly focused Key: Level of Sophistication National Association of Federal Credit Unions l www.nafcu.org
  7. 7. 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 National Association of Federal Credit Unions l www.nafcu.org
  8. 8. 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 National Association of Federal Credit Unions l www.nafcu.org
  9. 9. Benefits of Sophistication (We are judged by our Oversight and Controls)• Regulators: Better, Improved CAMEL ratings• Ratings Agencies: Cost/Availability of Funds• Insurance Companies: Insurance Premiums and Coverage National Association of Federal Credit Unions l www.nafcu.org
  10. 10. How Do We Get that Level of Sophistication?• Borrow Industry Best Practices – People – Technology – Processes• Get Public Information 10 National Association of Federal Credit Unions l www.nafcu.org
  11. 11. Evolution of Industry Best Practices Enterprise Risk Management Reputation Operating Strategic Financial Compliance Risk Management Transactional Market Liquidity Liquidity Market Credit Risk Management Interest Rate Interest Rate Credit Credit Credit 1970s 1980s 1990s National Association of Federal Credit Unions l www.nafcu.org
  12. 12. Credit People Technology Processes• Business • Predictive • Account level Analysts Modeling risk profiling• Underwriting • Simulation (credit rating Background (VaR) system)• Statistical • Reporting • Loan portfolio Background (multidimensio level outcome (novice-expert) nal) simulation • Stress Testing • Healthy Capital Structure National Association of Federal Credit Unions l www.nafcu.org
  13. 13. Credit Risk Analytics (Example) Credit Unit A is aiming to reduce bad credit charge-offs, and improve the process of reserving and capital structure.Account • PD, LGD, EAD (Data Mining) • Credit Scorecards • Credit Rating (IRB) • Stress Testing (application andPortfolio macroeconomic factors) • Exposure Simulation (50-th percentile vs. 99-th percentile) • Define Policy and Thresholds National Association of Federal Credit Unions l www.nafcu.org
  14. 14. Market People Technology Processes• Business • Forecasting • Performance Analysts • Simulation Monitoring• Investment (VaR) • Asset allocation Background • Performance based on risk• Statistical Reporting profile Background (multidimensio • Stress Testing (novice-expert) nal) • Healthy Capital Structure National Association of Federal Credit Unions l www.nafcu.org
  15. 15. 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 • Instrument/Position LevelInstrument Exposure Calculation (MTM) • Pricing functions • P/L curve/ Surfaces • Performance Monitoring • Stress Testing (based on riskPortfolio factors- pricing and macro) • Exposure Simulation (50-th percentile vs. 99-th percentile) • Define Investment Policy and Thresholds National Association of Federal Credit Unions l www.nafcu.org
  16. 16. Operational People Technology Processes• Business • Integrated data • Centralized Analysts/ Risk collection and Approach Managers process • Awareness and• Business Unit management Mitigation experience • Performance Action Reporting • Outcome (multidimensio Simulation nal) • Healthy Capital • Simulation Structure (VaR) National Association of Federal Credit Unions l www.nafcu.org
  17. 17. 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 • Centralized dataBusiness Unit collection/reporting • Centralized/Streamline process management • Ownership and Awareness • Event Modeling at BU levelCapital • Exposure aggregation by BU and Risk Type • Capital Allocation National Association of Federal Credit Unions l www.nafcu.org
  18. 18. 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 Business Acumen• It’s both Art and Science Goal Achievement Analytics National Association of Federal Credit Unions l www.nafcu.org
  19. 19. Art and Science “This, ultimately, is what risk managementand decision-making are all about and where the balance between measurement and gutbecomes the focal point of the whole story.” --Peter L. Bernstein Against the Gods: The Remarkable Story of Risk National Association of Federal Credit Unions l www.nafcu.org
  20. 20. NCUA’s Risk Categories and Risk Indicators CREDIT RISK Low Medium High FACTORS: Board and Operational Fully understands all Reasonably understands Does not understand Management aspects… key aspects… risks… Understanding Etc. INTEREST RATE RISK Low Medium High FACTORS: Board and Operational Fully understands all Reasonably understands Does not understand Management aspects… key aspects… risks… Understanding Etc. Art or Science?From NCUA Letter No.: 02-FCU-09 National Association of Federal Credit Unions l www.nafcu.org
  21. 21. Final Thought…. • Awareness Analytics• Expectations Goal Achievement • Decisions Business Acumen• Executions National Association of Federal Credit Unions l www.nafcu.org
  22. 22. Any Questions? Radu.Miclaus@sas.com (919) 780-8193 National Association of Federal Credit Unions l www.nafcu.org
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