ESSENTIAL INFORMATION
NEEDED BY BANK DIRECTORS
GBRW Limited, London
October 2013
1GBRW Consulting. London
GBRW Limited is a financial sector consulting company based in London with offices in Washington DC
and Singapore. It trad...
MODULE 1
Ladies and gentlemen
This is a bank
3GBRW Consulting. London
What is a bank?
• A bank is a financial go-between between people who put money on deposit
with the bank and people who bo...
Who are the stakeholders in the
bank? (in rough order of importance)
1. The current account holders and the depositors
2. ...
Why is a bank different?
• A bank borrows far more against its capital (8x its capital) than an industrial
company (maximu...
Ogden Nash
“ Most bankers live in marble halls
because they encourage deposits
and discourage withdrawals”
However, beware...
Module 2
The role and responsibilities
of the Board of Directors
The limited role of shareholders
1. To appoint and remove the members of the Board of Directors
2. To approve their salary...
The role and responsibilities of the
Board of Directors
1. GUIDE the executive of the bank. Mainly through:
Development an...
How can directors fulfil their role and
responsibilities?
• Directors need to be knowledgeable, well informed and active i...
What do directors need to
understand?
Capital How much capital does the bank need?
Assets Is the loan portfolio safe and s...
13
Typical Board Structure
Board Of Directors
Chairman
Board of Management
Chief Executive Officer
Audit Committee
Nominat...
14
Typical composition of the Board of Directors
Non-executive Chairman
Non-executive /
independent Director
Non-executive...
The committees of the Board of
Directors
• AUDIT COMMITTEE: has to be entirely independent of the executive, professional
...
The Chief Executive Officer and the
Board of Management
• The executive of the bank implement the policies and guidelines ...
17
The Board of Directors - at the Heart of the Bank
and Corporate Governance
Providecapitalto
Actininterestof
Are account...
18
EXECUTIVE BOARD
Treasury & Trading Group
Chief Treasury Officer
Risk Management Group
Chief Risk Officer
Retail Network...
Module 3
How much Capital does a
bank need?
The role of capital
• Represents the shareholders investment and increases with successful
operations and decreases when t...
Capital Adequacy Ratios
• Regulators will establish a minimum Capital Adequacy Ratio (CAR) which is
the amount of capital ...
DANGERS
• The CAR can easily slip close to or below the minimum required by the regulator as a result of
losses or over ex...
Structure of capital and its cost
• Capital is divided into Core or Tier 1 Capital and Supplemental or Tier 2
Capital.
• T...
Discussion topic
How can the bank, under pressure from
the regulator increase its Capital
Adequacy Ratio?
GBRW Limited, Lo...
The benefits of issuing subordinated
loans
• The rules are that Tier 1 capital must make up at least 50% of a bank’s total...
The issue of dividends
• The basic conflict in banks is that shareholders want profits and all other
stakeholders, in part...
Module 4
Measuring and maintaining
the quality of the assets
Controlling the loan portfolio
• Most bank failures result because the bank runs out of cash to pay its depositors
or its ...
Written loan policies
• Most banks now operate with written loan policies which are
recommended by the management and appr...
Discussion topic
The only question a lending banker has to ask is
“How do we get repaid?”
Banking facilities should be sel...
The Risk Appetite of the Board
• A short, 2 or 3 pages, high level statement made every year to the
management of the bank...
Loan Risk Rating System
• Almost all banks now give a rating to each individual loan.
• All loans generate a general provi...
Issues for the Board of Directors
• Is the Risk Rating System fair and reasonable? It should be reviewed once
a year by th...
What can the Board of Directors do if
loan losses are too high?
• What is too high? Every problem loan is one problem too ...
Module 5
Providing competent and
honest management
Responsibilities of the Board
• The Board delegates responsibility and authority for the daily running of the bank
to the ...
Nomination Committee
• A committee of the Board of Directors who considers all matters relating
to the employment and dism...
The Chief Executive Officer
• This is the key appointment. The CEO is usually a member of the Board of Directors
so his/he...
Discussion topic
How should the Board of Directors deal with an
over confident and domineering Chief
Executive Officer?
GB...
Salary and bonus schemes
• A key control of the Board as it encourages the executive to do what you want
them to do.
• Ann...
Team building and trust
• The Board of Directors and the Board of Management have to work
as teams.
• The doctrine of coll...
Fostering a culture of professionalism,
fair dealing and integrity
• A bank lives by its reputation, without this the hous...
Module 6
Understand the earnings of
the bank
What can shareholders reasonably
expect?
• The shareholders are taking a risk in investing in the bank and thus
deserve a ...
Where are the earnings coming from?
• Directors need to understand the business model of the bank.
• A sudden increase in ...
The knotty question of pricing
• Any fool can make a cheap loan or bring in an expensive deposit. The
Front Office divisio...
Cutting the cost of providing a loan is as
valuable as increasing the margin
… and less risky. The higher the margin a cus...
Discussion question
How can a commercial bank limit the increase
in its operational costs?
through centralisation, standar...
MODULE 7
Conservative liquidity and
funding allow the bank to
survive
Having enough cash at the right time
is the key
• Banks go bankrupt when they don’t have enough money to meet their
liabil...
Maturity miss-match position
• The most important document produced by the Secretariat to the ALCO is the
maturity miss-ma...
What is liquidity?
• Liquidity is defined as:
– cash held by the bank,
– short term deposits with reliable financial insti...
What happens in a crisis?
• Depositors demand their money back. Banks are usually the first as they know what is
happening...
Central role of the ALCO
• The ALCO (the Assets and Liabilities Committee of the Board of Management)
is the most importan...
What ratios should the Board look at?
• Capital Adequacy Ratio (ideally 2% over the ratio required by the regulator)
• Liq...
STRUCTURE OF THE BALANCE SHEET
Capital and Liabilities Assets
Capital Cash and banks 10
Tier 1 10 Liquid investments 20
Ti...
What are the danger signals of a
pending liquidity crisis?
• An increase in the cost of funding the bank that is not relat...
Discussion topic
What do you do if there is a liquidity crisis in the
bank (or in the banking system generally)
GBRW Limit...
MODULE 8
Strategy is a key control
instrument of the Board
59
The strategy of the bank is approved
by the Board of Directors
• The Board should give an annual instruction to the manage...
What are the basic strategies needed
by banks to survive?
1. Make sure the bank never runs out of money (the job of the AL...
Discussion
What strategy should the bank follow in an over saturated banking market?
1. Retail or corporate or both?
2. La...
Module 9
Compliance with the
regulatory and legal
framework
110% compliance
• The bank has at all times to be wholly compliant with all regulation and
domestic and international law ...
AML, CTF and FATF
• The directors are required to embed a culture of compliance with all domestic and international
law to...
A word about international loan
agreements
• It is always attractive to obtain longer term funding from international inst...
Is it worth obtaining an international
credit rating?
• An international credit rating from Standard & Poors, Moodies or
F...
MODULE 10
Audit and Reporting
68GBRW Limited, London
Central role of the Audit Committee
• The Audit Committee protects the Board of Directors from heavy
fines or even jail.
•...
When did Internal Audit tell you
something you didn’t know already?
• The central problem is that the Internal Audit Depar...
Discussion issue
How can the Board of Directors make the
Internal Audit Department more useful and at
the same time provid...
How to get more out of the external
auditors
• The bank has to have an external audit from a major international firm,
oth...
Monthly Report
• The key reporting documents are the Monthly Report by the executive of
the bank and the ALCO report (see ...
Module 11
Risk Management
Basle II
Now a standard banking requirement of all supervisors worldwide. It has 3
pillars:
1. Minimum capitalisation to c...
Chief Risk Officer (CRO)
• Head of the Risk Management Division.
• GBRW can provide Job Descriptions for all key roles in ...
Credit Risk
• The RMD has to approve all corporate, retail and treasury
lending limits from the point of view of the secur...
Side issue: how to decline credit
• When the RMD or the Credit Committee decline a lending proposal, they should
give 3 re...
Examples of market risk
additional to those in attached job description of CRO
• Interest Rate Risk: bank makes fixed rate...
Operational Risk
• This is the risk of losses to the bank arising from inadequate or failed
internal processes, people, sy...
Question?
What can the Board of Directors do to protect
the independence of the CRO and enable
him/her to make decisions w...
MODULE 12
What can go wrong and what the
Board of Directors can do about it
Reliance on volatile and unreliable
funding sources
• A major if not the primary reason for bank failures. One of the
prob...
Imprudent loan practices and sector
exposure
• The classic route to bank failure as a result of poor lending is
exposure t...
A weak Board of Directors not
understanding the business
• It can be very difficult if the board comprises of amateurs who...
Be aware of what is happening in the
Treasury and Trading Division
• The Treasury and Trading Division should be making a ...
What Boards need to do to protect
themselves
1. Know and understand their business by being well informed, experienced
and...
Module 13
The future of banking?
Competition will always be heavy
• Just accept that you will always face heavy competition from other
banks, in particular...
Beware the temptation to
concentrate on major companies
• All banks naturally want to bank the major companies, they tend ...
What most domestic banks do
• As they grow and develop, most banks have to gravitate towards
retail and smaller corporate ...
Cost control
• Running a bank is expensive. Operating costs are high because a bank employs a
lot of people (and numbers a...
Cut out “dead money”
• Look at the assets side of the balance sheet and consider how much
is earning a return.
• Cash is a...
Banking should be safe
• Banking is a utility industry. It provides an essential service to the community.
• To be consist...
Module 14
GBRW Limited
GBRW Limited
GBRW is a banking consultancy based in London. It is staffed entirely
by former senior bankers.
GBRW would we...
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131005 essential information neeed by members of the board of directors of banks

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This presentation is intended for directors of banks in developing markets who may have limited technical knowledge. It seeks to provide them with an understanding of how banks work and what decisions they will have to make as directors responsible for the bank.

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131005 essential information neeed by members of the board of directors of banks

  1. 1. ESSENTIAL INFORMATION NEEDED BY BANK DIRECTORS GBRW Limited, London October 2013 1GBRW Consulting. London
  2. 2. GBRW Limited is a financial sector consulting company based in London with offices in Washington DC and Singapore. It trades under the name of GBRW Consulting. The company was established in 1995. We advise clients worldwide at reasonable fee levels, drawing on international best practice. This presentation was prepared by Jeremy Denton-Clark, Director as an aide to bankers in developing economies. It is derived from seminars given to bankers and is not based on any country nor bank. This presentation is purely descriptive, based on general international standards, and does not, therefore, establish any legally nor contractually binding requirements nor obligations nor set any precedents. Neither GBRW Limited nor Jeremy Denton-Clark accept any responsibility for the consequences of any actions that banks or other institutions may take when implementing all or part of the proposals in this presentation. GBRW can be contacted on mail@gbrw.com or go to our website www.gbrw.com for further information on this and other topics of interest to bankers in developing economies London October 2013 GBRW Limited, London
  3. 3. MODULE 1 Ladies and gentlemen This is a bank 3GBRW Consulting. London
  4. 4. What is a bank? • A bank is a financial go-between between people who put money on deposit with the bank and people who borrow money. The bank takes a turn in the middle. • A bank provides short term working capital loans to fund the gap between customers paying their bills and stock being sold, thus a working capital loan is self liquidating. • A bank provides longer term loans to buy plant and machinery that is paid back from increased production and thus profits. It is also self liquidating. • A bank transfers money and exchanges money for other forms of money. • A bank is a utility just as electricity and water companies are utilities. National economics cannot exist without them. 4GBRW Consulting. London
  5. 5. Who are the stakeholders in the bank? (in rough order of importance) 1. The current account holders and the depositors 2. The bond holders (long term lenders) 3. Creditors 4. Holders of Tier 2 debt 5. The shareholders (holders Tier 1) 6. Customers (loan portfolio) 7. The staff 8. The regulatory authority/banking system 9. The fiscal authorities 5GBRW Consulting. London
  6. 6. Why is a bank different? • A bank borrows far more against its capital (8x its capital) than an industrial company (maximum 1.5 x its capital). • The foundations of a bank is the confidence placed in it by all the stakeholders. Loose that confidence and the bank comes tumbling down. • The liabilities of a bank are short term whilst its assets are long term. A bank “borrows short and lends long”. • A bank is a house of cards that can easily fall down. • The banking system provides an essential service and cannot be allowed to collapse (danger of systemic failure) 6GBRW Consulting. London
  7. 7. Ogden Nash “ Most bankers live in marble halls because they encourage deposits and discourage withdrawals” However, beware turning away from your physical roots , moving into grander buildings and changing your culture e.g. from retail to investment banking. 7GBRW Consulting. London
  8. 8. Module 2 The role and responsibilities of the Board of Directors
  9. 9. The limited role of shareholders 1. To appoint and remove the members of the Board of Directors 2. To approve their salary and bonus (this isn’t always transparent) 3. To appoint the external auditors 4. To approve changes in the share structure of the bank that are outside the normal course of business. 5. To approve changes to the charter of the bank. 6. The shareholders receive the Annual Report, a synopsis of the strategy and can ask questions at the general meeting but this is for information not decision making Shareholders have rights but a limited role in influencing the bank 9GBRW Limited, London
  10. 10. The role and responsibilities of the Board of Directors 1. GUIDE the executive of the bank. Mainly through: Development and delivery of the Risk Appetite of the Board The approval of the strategy of the bank. Ratification of the loan policies of the bank. Discussion at Board meetings where senior executives are present 2. APPOINT AND DISMISS members of the Board of Management, including the CEO, to whom all executive responsibility has been delegated. Set their salaries and bonus scheme. Appoint and dismiss the head of the Internal Audit Department (and the Company Secretary). 3. MONITOR AND EVALUATE The actual performance of the bank against budget The control system of the bank. The members of the Board of Directors are, in most jurisdictions, personally responsible for the safety, control and governance of the bank. They can be sued or even sent to jail (it is thus sensible for them to have Directors and Officers Insurance) 10GBRW Limited, London
  11. 11. How can directors fulfil their role and responsibilities? • Directors need to be knowledgeable, well informed and active in overseeing the management of the bank (they will be helped in this by the Company Secretary (see separate GBRW presentation on the role of the Company Secretary). • This means they need a basic understanding of the business of banking and what they need to look at when overseeing a bank and what control instruments are at their disposal. • To give them these basic knowledge tools we are using the CAMELS CAR system 11GBRW Limited, London
  12. 12. What do directors need to understand? Capital How much capital does the bank need? Assets Is the loan portfolio safe and secure? Management Is the management doing its job? Earnings How does the bank make its money? Liabilities Is the funding and liquidity secure and reliable? Strategy Does the bank have the right strategy? Compliance Is the bank wholly compliant with law and regulation? Audit Are they really doing their job? Risk Can they act truly independently? 12GBRW Limited, London
  13. 13. 13 Typical Board Structure Board Of Directors Chairman Board of Management Chief Executive Officer Audit Committee Nomination Committee Credit Committee Risk Committee Remuneration Committee Assets & Liabilities Committee Chief Internal Auditor External Audit Senior Partner Chief Compliance Officer Chief Risk Officer Chief Financial Officer Chief Risk Officer Full voting members Not a member, but attending Structure/governing body Tools >> Commitment >>>> Disclosure >> SH Rights & Stakeholders Intro >> What is and Why CG >> No CG? >>>Troubleshooting GBRW Limited, London
  14. 14. 14 Typical composition of the Board of Directors Non-executive Chairman Non-executive / independent Director Non-executive / independent Director Non-executive / independent Director Non-executive / independent Director Head of Retail Services Head Corporate Banking Chief Executive OfficerExecutive Directors Non-executive/ independent Directors Chief Financial OfficerCompany Secretary In attendance GBRW Limited, London
  15. 15. The committees of the Board of Directors • AUDIT COMMITTEE: has to be entirely independent of the executive, professional and informed membership. This is not a sinecure. It is responsible for ensuring that the figures reported by the bank are 100% accurate. See Module 10. • RISK COMMITTEE: looks at risk policies at the macro level. It does not consider individual credits, that is the job of the executive. Makes final recommendations on specific provisions to the Board of Directors. • NOMINATION COMMITTEE: recommends appointments to the Board of Directors and the Board of Management. Should establish a standard methodology and use a recruitment agency to avoid any charge of patronage and favouritism. There is no “Right of Succession”. See Module 5. • REMUNERATION COMMITTEE: recommends salary and bonus schemes of the Board of Management to the Board of Directors, as well as payments to the Board of Directors (all of which should be disclosed in the Annual Report to shareholders). 15GBRW Limited, London
  16. 16. The Chief Executive Officer and the Board of Management • The executive of the bank implement the policies and guidelines set by the Board of Directors – they act according to instructions and are the servants of the Board (this means the Board of Directors carry all the responsibility for everything that happens in the bank). • All executive authority has been delegated to the CEO and the Board of Management by the Board of Directors. • The executive are solely responsible for the day-to-day running of the bank. • They are a team and the CEO is the primus inter pares “First amongst equals” leading and developing the executive team. • The CEO is primarily responsible for the development of the 5 year Strategic Plan and the 1 Year Business Plan, the efficient operation of the bank and the bank meeting its targets. 16GBRW Limited, London
  17. 17. 17 The Board of Directors - at the Heart of the Bank and Corporate Governance Providecapitalto Actininterestof Are accountable toElect and dismiss Shareholders - The annual general assembly - Board of Directors Board of Management - The management team of executives - Report and answer toGuide and control The relationships between the main governing bodies Intro >> GBRW Limited, London
  18. 18. 18 EXECUTIVE BOARD Treasury & Trading Group Chief Treasury Officer Risk Management Group Chief Risk Officer Retail Networks Group Chief Retail Officer Operations Group Chief Operations Officer Wholesale Banking Group Chief Banking Officer Financial Group Chief Financial Officer SHAREHOLDER BORAD OF DIRECTORS Supervisory Committee (Audit Committee) Risk Committee Normination Committee Credit Committee IT Steering Committee ALCO Relationships Department Products Department Marketing Department Retail Department Channel Management Department Dealing Room Department Clients Department Credit Department Fiancial Institutions Department Market Risk Department Operational Risk Department Back Office Department IT Department Accounting Department Management Reporting Department Property & Services Department Financial Control Department Internal Audit SALES RISKTRADINGDISTRIBUTION ADMINISTRATION ACCOUNTING GBRW Limited, London
  19. 19. Module 3 How much Capital does a bank need?
  20. 20. The role of capital • Represents the shareholders investment and increases with successful operations and decreases when there are losses. • The problem with banking is that the cost of the liabilities is known down to the last cent. The value of the assets (apart from cash which is an expense) is never quite so certain. • Capital is the cushion that protects the bank against unanticipated losses and declines in the value of the assets. • Remember: banks have little capital and a lot of liabilities, this usually leaves hardly enough room for error. 20GBRW Limited, London
  21. 21. Capital Adequacy Ratios • Regulators will establish a minimum Capital Adequacy Ratio (CAR) which is the amount of capital expressed as a percentage of total assets (total assets are adjusted to reflect the amount of risk in each category of asset). • The usual CAR is 8% but many regulators will require a much higher ratio of up to 12% • It is important for banks to show a higher CAR than the minimum required by regulators. Maybe 2% higher. 21GBRW Limited, London
  22. 22. DANGERS • The CAR can easily slip close to or below the minimum required by the regulator as a result of losses or over expansion of the loan portfolio. Be careful even if you slip to within 1% of the CAR. • The reaction of the regulator is usually very negative and will require immediate action, this often means reducing the assets of the bank which will adversely effect competiveness and profits. • Any deductions in the calculation of the CAR i.e. lending to insiders, are very expensive in terms of lost profitability. Lending to companies controlled by shareholders can be seen as giving back to the shareholders the capital they have invested in the bank 22GBRW Limited, London
  23. 23. Structure of capital and its cost • Capital is divided into Core or Tier 1 Capital and Supplemental or Tier 2 Capital. • Tier 1 capital consists of capital paid in by the shareholders, reserves that are not allocated against losses and accumulated profits that have not been paid out to shareholders. • Tier 1 capital is interest free money for the bank but in reality it is very expensive as it is on capital that the Return on Equity is calculated. The lower the capital the higher the Return on Equity. • Tier 2 capital is mainly subordinated loans. As it is a loan the bank has to pay interest on it. As it is subordinated to all depositors and creditors it is more expensive (maybe 3%) than any other deposits 23GBRW Limited, London
  24. 24. Discussion topic How can the bank, under pressure from the regulator increase its Capital Adequacy Ratio? GBRW Limited, London 24
  25. 25. The benefits of issuing subordinated loans • The rules are that Tier 1 capital must make up at least 50% of a bank’s total capital (thus restricting the use of Tier 2 capital). • Tier 2 capital must be issued for a period of greater than 5 years. • The great advantage is that Tier 2 capital can be considered as capital when calculating the CAR but it is not capital when calculating the Return on Equity or paying dividends. Banks can have their cake (additional capital) and eat it (not pay a dividend on the subordinated loan) • The Tier 2 capital is subordinated to creditors and depositors (in liquidation it is paid after they have been paid). It is thus more expensive. • The higher the level of Tier 2 capital, the higher the loan portfolio and the higher the profits. 25GBRW Limited, London
  26. 26. The issue of dividends • The basic conflict in banks is that shareholders want profits and all other stakeholders, in particular depositors, want solidity and reliability • A major factor in bank solidarity is the capital base which will be reduced by the payment of dividends. This reduces the ability of the bank to increase its loan portfolio and thus its profitability • If no dividends are paid the capital is increased and the value of the shares will increase. • Companies can take this increased value when revaluing their portfolio, individuals usually can’t and want cash 26GBRW Limited, London
  27. 27. Module 4 Measuring and maintaining the quality of the assets
  28. 28. Controlling the loan portfolio • Most bank failures result because the bank runs out of cash to pay its depositors or its loans default and turn bad. • Loans are the largest part of the assets of the bank, often 60% but sometimes more (70% is high and 80% is too high). • The directors cannot and should not become involved in individual loan decisions. They don’t have the expertise and it provides an umbrella to the management “The Board of Directors approved this so it must be good and it is not our responsibility”. • Directors control the loan portfolio through: – Agreeing the strategy of the bank (see Module 8) – Establishing a Risk Appetite of the Board (see draft document) – Written loan policies – Ensuring the bank has a fully operational internal control system (see Modules 10 and 11) 28GBRW Limited, London
  29. 29. Written loan policies • Most banks now operate with written loan policies which are recommended by the management and approved by the Board of Directors. • These loan policies will be detailed and cover all the major issues. GBRW are happy to provide a list. 29GBRW Limited, London
  30. 30. Discussion topic The only question a lending banker has to ask is “How do we get repaid?” Banking facilities should be self liquidating. GBRW Limited, London 30
  31. 31. The Risk Appetite of the Board • A short, 2 or 3 pages, high level statement made every year to the management of the bank giving a broad directive on how the business should be developed and the limitations on that development. • An example can be provided by GBRW • This is written by the Board of Directors and presented to management (who can comment because they have to implement it but they cannot change it if the Board of Directors are happy with it) 31GBRW Limited, London
  32. 32. Loan Risk Rating System • Almost all banks now give a rating to each individual loan. • All loans generate a general provision of 2% of the loan amount • These ratings are usually: A: Satisfactory loan: is functioning normally according to the contact with the customer (2% general provision) B: Potential problem loan: there are some things wrong which if not corrected could result in a loss (5% - 15% specific provision) C. Substandard loan: there are obvious problems, in particular if interest and principal payments are late (16% – 40% specific provision). D. Doubtful: full repayment is now unlikely (40% - 75% specific provision) E. Loss: uncollectable and taken off the portfolio (100% full provision) • The allocation to categories C, D and E should be based on the number of days payments are past the due date. The percentage within each category is based on management assessment of collectability. Loans in category A and B should not be past due by more than 45 days (sometimes 60 or even 90 days) which is enough time for the Business Development Officer to correct the default. 32GBRW Limited, London
  33. 33. Issues for the Board of Directors • Is the Risk Rating System fair and reasonable? It should be reviewed once a year by the Board. • Are the loans given the right risk rating by the Front Office/Credit Committee? • Is that risk rating agreed by the independent Risk Management Division (which can create tension) • Is the risk rating reviewed at least once a year on every loan – including all long term loans? • Are loans being artificially kept in Categories A or B through maturity extensions or bullet maturities? How many times can a loan be extended? 33GBRW Limited, London
  34. 34. What can the Board of Directors do if loan losses are too high? • What is too high? Every problem loan is one problem too many. There is nothing more expensive than a problem loan. The bank is in the business of risk so problem loans are inevitable. • If the average margin is 4% and losses on the portfolio 2% is that too high or acceptable business? • Require greater authority and resources be given to Risk Management Department and in particular the Loan Recovery Department but this will be expensive and is a negative rather than a positive reaction. Cut operating costs? • Change the management but what if they are within guidelines and done everything that the Board has instructed them to do? • Change the strategy and Risk Appetite of the Board. The ultimate responsibility for losses lies with the Board of Directors and not the executive. “The fault dear Brutus lies not in the stars but in ourselves” William Shakespeare. 34GBRW Limited, London
  35. 35. Module 5 Providing competent and honest management
  36. 36. Responsibilities of the Board • The Board delegates responsibility and authority for the daily running of the bank to the management and thus they are the only people who have any executive authority (the Board has no executive authority). • However, the Board are still personally accountable to the shareholders and other stakeholders for the safe, sound and efficient operation of the bank (and this members of the Board require Directors and Officers Insurance) • The Board are primarily responsible for the nomination of the Chief Executive Officer and the ratification of his/her appointments to the Board of Management. • All appointments below this level are the responsibility of the Board of Management (apart from the Internal Auditor and the Company Secretary who are appointed by the Board of Directors) 36GBRW Limited, London
  37. 37. Nomination Committee • A committee of the Board of Directors who considers all matters relating to the employment and dismissal of the management before making a recommendation to the Board. • Sometimes it can be the “Nomination and Remuneration Committee” of the Board. The Remuneration Committee review and recommend to the Board of Directors the salary and bonus/inventive scheme of the CEO and senior management. • GBRW are happy to provide a draft charter of the Nomination and Remuneration Committee 37GBRW Limited, London
  38. 38. The Chief Executive Officer • This is the key appointment. The CEO is usually a member of the Board of Directors so his/her appointment has to be approved by the shareholders. • There has to be complete trust between the CEO and the Board. The Board has to be wholly confident that the CEO, and hence the executive management are acting in accordance with the guidance of the Board. The executive implement the policy of the Board. • A primary responsibility of the CEO is to build a team as her/she cannot be expected to take every executive decision (if they think they can then they are a danger to all stakeholders – and themselves). • The CEO, along with the Chairman of the Board of Directors, is the public face of the bank. 38GBRW Limited, London
  39. 39. Discussion topic How should the Board of Directors deal with an over confident and domineering Chief Executive Officer? GBRW Limited, London 39
  40. 40. Salary and bonus schemes • A key control of the Board as it encourages the executive to do what you want them to do. • Annual bonus is paid to members of the Board of Management on achievement of Key Performance Objectives (KPIs). • These KPIs should not only relate to profitability but also to building the strength and security of the bank e.g. reduction in problem loans, building the retail deposit base, reduction in growth of costs – in other words an incentive for management to meet the objectives of the Board. • The maximum annual bonus should not generally be greater than 130% of salary or the total bonus for all executives be greater than 2.5% of the equity of the bank 40GBRW Limited, London
  41. 41. Team building and trust • The Board of Directors and the Board of Management have to work as teams. • The doctrine of collective responsibility applies to both boards. You cannot duck out of a decision by voting “no”. • The Board of Directors have to entirely confident that the executive are doing what they are asked to do and the executive have to be entirely comfortable that the Board will not give them unreasonable and unrealistic targets and objectives. • It comes down to trust, working together and actually liking each other or at least having respect for each other. There is no room for mavericks when handling other people’s money. 41GBRW Limited, London
  42. 42. Fostering a culture of professionalism, fair dealing and integrity • A bank lives by its reputation, without this the house of cards will collapse. It has to be seen by the world at large as honest, fair and competent. An institution to be emulated. • The job of the Board of Directors is to foster this culture, mainly by not insisting on unrealistic profit targets that might push management to unethical practices but also by example and regulation. • GBRW are happy to provide a draft Code of Ethics. GBRW Limited, London 42
  43. 43. Module 6 Understand the earnings of the bank
  44. 44. What can shareholders reasonably expect? • The shareholders are taking a risk in investing in the bank and thus deserve a premium over and above what they would have earned if they had invested in a risk free asset such as Treasury Bills – a premium of 3% would be reasonable. • To push for a higher return may be achieved in the short term but may well result in problems at a later date – it is always easy to lend money, getting it back can be the hard part. • Thus a key to successful banking is to limit the influence that shareholders have upon the bank – which is one of the objects of Corporate Governance (see Module 2). 44GBRW Limited, London
  45. 45. Where are the earnings coming from? • Directors need to understand the business model of the bank. • A sudden increase in earnings needs to be understood, especially if it comes out of the Treasury and Trading Division. Increased earnings usually means increased risk • Monitor the ROAA (Return on Average Assets) and the reasons for any change for it may be good or bad news. 45GBRW Limited, London
  46. 46. The knotty question of pricing • Any fool can make a cheap loan or bring in an expensive deposit. The Front Office divisions have to work within parameters (this usually creates difficulties and special pleading for “deserving” credit applications). • Minimum and maximum pricing policies on deposits as well as loans are set by the ALCO as they have the overview with responsibility for the bank meeting its Return on Equity and other targets. • Does the bank calculate the true cost of making a loan? • The bank needs to factor in amongst other things the cost of involuntary deposits, usually at a cheap rate, with the central bank, potential loss losses, share of operational costs as well as funding and use of capital (every asset has a capital cost) 46GBRW Limited, London
  47. 47. Cutting the cost of providing a loan is as valuable as increasing the margin … and less risky. The higher the margin a customer is prepared to pay the greater their need for cash and the risk to the bank. Cheaper funding is the fast track to greater profitability. Operational costs will always rise and sometimes are on the fast track as well. The key is to limit the increase to around the rate of inflation 47GBRW Limited, London
  48. 48. Discussion question How can a commercial bank limit the increase in its operational costs? through centralisation, standardisation and mechanisation? 48GBRW Limited, London
  49. 49. MODULE 7 Conservative liquidity and funding allow the bank to survive
  50. 50. Having enough cash at the right time is the key • Banks go bankrupt when they don’t have enough money to meet their liabilities. This arises from: Funding Liquidity Risk (not enough cash) Market Liquidity Risk (markets drying up suddenly) • If banks held all their assets in cash they wouldn’t make any money. • Thus there has to be a balance between available cash and assets that take time to turn into cash such as loans and fixed assets. • The usual benchmark is that liquid assets (those that can be turned into cash within 30 days) should be around 30% of total assets. 50GBRW Limited, London
  51. 51. Maturity miss-match position • The most important document produced by the Secretariat to the ALCO is the maturity miss-match position. • This shows the maturity dates of the assets and liabilities of the bank in series of “buckets” or time zones. • The hard part is getting it right (the liabilities can be legally due and payable before the bank thinks they mature) and deciding on the maximum open short positions in the short term “buckets. • This means how large a gap is it safe and prudent for the bank to allow (or has to fill if there is a crisis) • The Board of Directors should ask management how they propose to fill those gaps should the need arise (use standby credits, lay off part of the loan portfolio at a discount, convert deposits to equity). GBRW Limited, London 51
  52. 52. What is liquidity? • Liquidity is defined as: – cash held by the bank, – short term deposits with reliable financial institutions (including mandatory deposits with the central bank) – investments in undoubted instruments that can be converted quickly into cash, this usually means Treasury Bills that can be sold on a secondary market (albeit at a discount but cash when you need it is more important than price). • The trouble with liquid instruments is that they don’t earn as much money as loans. • Cash is an expense to the bank (it has to be counted, moved and insured and earns nothing). Short term deposits with banks earn very little return and liquid negotiable instruments pay a very low rate if they are available at all. • The ALCO needs to establish a Minimum Liquidity Guideline 52GBRW Limited, London
  53. 53. What happens in a crisis? • Depositors demand their money back. Banks are usually the first as they know what is happening, then corporate depositors and finally retail depositors. • Retail depositors will be more loyal or misinformed (and maybe they think they are covered by the national bank deposit scheme which may not always be the case if they don’t have enough money themselves) • Term depositors will also demand their money back (the law may be on their side) • Repayment of customer loans will slow. They will think they won’t have to repay if the bank goes bankrupt and may need to be reminded of their legal obligations. • All sources of new funding will dry up • Everything will come down to daily cash flow (and confidence in survival) GBRW Limited, London 53
  54. 54. Central role of the ALCO • The ALCO (the Assets and Liabilities Committee of the Board of Management) is the most important committee in the bank – more important than the Credit Committee. • The ALCO is the pumping heart of the bank that circulates the blood in the form of cash around the bank. • GBRW can provide a charter including the role and responsibilities of the ALCO. • A fully functioning ALCO is central to the security and safety of the bank. • The Board of Directors should have available copies of the presentations made by the ALCO Secretariat as it should contain all the information needed for the Board to be satisfied that the bank is adequately and prudently funded. 54GBRW Limited, London
  55. 55. What ratios should the Board look at? • Capital Adequacy Ratio (ideally 2% over the ratio required by the regulator) • Liquidity ratio: how much cash is readily available to the bank? 30% of total assets available within 30 days is an international standard. • Deposit to loan ratio: how much of the deposits are used to fund the illiquid loan portfolio – 80% would be a benchmark. More should generally be avoided. • Number of large loans: maximum loan 25% of total equity. Loans over 10% of equity to be restricted to 10 facilities • Number of large deposits: banks should avoid large deposits in the same way that they should avoid large loans. The sudden withdrawal of a large deposit or deposits could lead to a sudden lack of liquidity. – Deposits in excess of 25% of the capital should not be sought and the number of large deposits in excess of 10% of capital should be limited e.g. the 10 largest deposits should not be in excess of 300% of capital – Typically large deposits from the state or state owned enterprises can lead to a concentration of deposits that are vulnerable to political change. • Operating costs as a percentage of total income. Some banks claim 40%, a more normal figure is 60% and 80% is too much and “something needs to be done”.. 55GBRW Limited, London
  56. 56. STRUCTURE OF THE BALANCE SHEET Capital and Liabilities Assets Capital Cash and banks 10 Tier 1 10 Liquid investments 20 Tier 2 (Sub' debt) 5 15 Total liquidity 30 Bonds and MT loans 10 Loan portfolio 65 Deposits 75 Fixed assets 5 Totals 100 100 GBRW Limited, London 56
  57. 57. What are the danger signals of a pending liquidity crisis? • An increase in the cost of funding the bank that is not related to a general increase in interest rates. • A change in the composition of deposits, the bank bidding for additional funds in the money markets. • Liquidity ratios under pressure (as in the example above) • Adverse press comment (directors should always keep their eye on the press) • Other banks cutting their inter-bank lending limits (banks are always the first people to sniff out a crisis) 57GBRW Limited, London
  58. 58. Discussion topic What do you do if there is a liquidity crisis in the bank (or in the banking system generally) GBRW Limited, London 58
  59. 59. MODULE 8 Strategy is a key control instrument of the Board 59
  60. 60. The strategy of the bank is approved by the Board of Directors • The Board should give an annual instruction to the management to prepare an up-date of the 5 year Strategic Plan and add some brief guidelines (maximum 1 page). • The Strategic Plan is prepared by management because it is they who have to implement it. They have to believe in it (and their bonus depends upon it). • The Strategic Plan must include projected 5 year Balance Sheet and Profit and Loss Account (the first year of which forms the 1 year Business Plan). • This is a principal tool by which the Board provides guidance and direction to the executive 60
  61. 61. What are the basic strategies needed by banks to survive? 1. Make sure the bank never runs out of money (the job of the ALCO monitored by the Board of Directors) 2. Make sure the bank is not swamped by bad debt (the job of the Credit Committee guided by the Board) 3. Keep operational costs under control (the job of the CEO monitored by the Board) 4. Ensure that the operations and business of the bank are tightly controlled (the responsibility of the Board) 5. Make sure that the bank always maintains its reputation for prudence, safely and soundness as a place for customers to deposits their hard earned money 61
  62. 62. Discussion What strategy should the bank follow in an over saturated banking market? 1. Retail or corporate or both? 2. Large corporate or SME or both? 3. Nationwide or regional? 4. Expand or cut back on branch network? It is expensive. Internet and telephone banking are cheaper 5. Can you afford the IT necessary to keep up with foreign owned banks? 6. Can you afford a quality customer service or do you go for volume. The MacDonald's approach. 7. How broad a range of bank products and services? Specialised or universal? 8. Buy in deposits or build retail? 9. Subsidiaries to market specific products such as leasing, factoring, home loans 10. Target Return on Equity to satisfy shareholders whilst remaining a safe and sound bank. Most banks have roughly the same Strategic Plan, so what do you do to make your bank special? 62
  63. 63. Module 9 Compliance with the regulatory and legal framework
  64. 64. 110% compliance • The bank has at all times to be wholly compliant with all regulation and domestic and international law as well the covenants of any Loan Agreements entered into by the bank • To avoid mistakes or a sudden event taking the bank down to 95% compliance it is sensible to ensure 110% compliance e.g. on minimum Capital Adequacy Ratios, Liquidity Ratios, Large Loan policies etc. • The Company Secretary has a primary responsibility to ensure that at all times the bank is operating within the law (the Company Secretary reports to the Board of Directors not the executive of the bank) • The ALCO report will provide confirmation of compliance with the requirements of the local regulatory authority. 64GBRW Limited, London
  65. 65. AML, CTF and FATF • The directors are required to embed a culture of compliance with all domestic and international law to preserve the reputation and integrity of the bank, something that has been recently sadly lacking in some major banks such as Barclays and HSBC to their considerable cost. • The language of initials: AML (Anti Money Laundering), CTF (Combating Terrorist Financing), FATF (Finance Action Task Force and their 40 recommendations). • Beware the global reach of US legislation: OFAC (The Office of Foreign Assets), US Patriot Act and FATCA (Foreign Account Tax Compliance Act). • To protect themselves the directors need to ensure that there is a full methodology in place to deal with all these issues: including fraud prevention, anti-bribery and corruption, identity theft and “phishing”. Training needs to be provided to all staff, including members of the Board of Directors (e-learning will considerably reduce the cost). • This can bite you as many decisions are taken lower down the decision making chain. GBRW Consulting. London 65
  66. 66. A word about international loan agreements • It is always attractive to obtain longer term funding from international institutions. The long term money can be used to fund the longer term needs of customers and the fact that the bank can borrow from an international institution enhances the reputation and standing of the bank. • However, there may be drawbacks: – The loan may be made in a foreign currency and the exchange risk will fall upon the bank and not the lender or be passed to their customers which is effectively the same thing. – The loan will come with conditions. These conditions will be much the same as international standards but may not always suit the business model of the bank. – The lender may not be sympathetic should any of these conditions be broken – The loan could be expensive in relative to the cost of short term local deposits. • The bank should approach such agreements with some caution as it will probably entail some of loss of independence/compliance with international standards. This may be no bad thing but you should understand the implications. 66GBRW Limited, London
  67. 67. Is it worth obtaining an international credit rating? • An international credit rating from Standard & Poors, Moodies or Fitch will concentrate the mind of the executive to comply with international standards (and thus domestic regulation). • A reasonable credit rating will encourage international investors to deposit funds or invest in Tier 2 capital of the bank. • The bank cannot have a better credit rating than the country in which it operates. If the country has a poor credit rating it is probably not worth the expense of obtaining a credit rating. • However, it is probably worth the cost and disruption, if only because it gives an insight into how international lenders expect banks to be run and pushes the bank in that direction if it is not there already 67GBRW Limited, London
  68. 68. MODULE 10 Audit and Reporting 68GBRW Limited, London
  69. 69. Central role of the Audit Committee • The Audit Committee protects the Board of Directors from heavy fines or even jail. • The Board of Directors cannot themselves verify the accuracy of the accounts nor compliance with all law and regulation. • They rely on the Audit Committee who themselves rely on Internal Audit Department and the external auditors of the bank. • The auditors confirm to the Audit Committee that the accounts are accurate. The Audit Committee confirm this to the Board of Directors and the Board of Directors confirm this to the shareholders. • If it turns out that this is not the case, then it is the Board of Directors who are responsible for not putting in place the right level of controls. • GBRW can provide a draft charter of the Audit Committee. 69GBRW Limited, London
  70. 70. When did Internal Audit tell you something you didn’t know already? • The central problem is that the Internal Audit Department may report to the Audit Committee but operationally they are controlled by the executive of the bank. • They are not likely to seriously challenge the people that set their salaries, bonus scheme, promotion and transfers. • Thus they can be only box tickers, checking the minutia of the bank’s operations but missing the big issues. This is of course not true in every bank but you are fortunate if they provide you with useful insights and are able to address the “hot potatoes” such as lending to bank officers or companies owned by them, large loans to influential borrowers, conflicts of interest. • The minutia has of course to be checked but don’t rely on Internal Audit to protect the Board of Directors from challenge from the shareholders. 70GBRW Limited, London
  71. 71. Discussion issue How can the Board of Directors make the Internal Audit Department more useful and at the same time provide protection for them? 71GBRW Limited, London
  72. 72. How to get more out of the external auditors • The bank has to have an external audit from a major international firm, otherwise it will not be credible. • That audit has to be clean and prompt (not 6 months after the reporting date when it is published) • The fees of international firms are time based so negotiate for the bank, usually the Internal Audit Division, to do as much of the audit preliminary work as they can before the actual external audit starts. • Pay great attention to the “audit letter” following completion of the audit • Bring them into the Audit Committee as they have broad experience of dealing with issues in many banks. GBRW Limited, London 72
  73. 73. Monthly Report • The key reporting documents are the Monthly Report by the executive of the bank and the ALCO report (see Module 7) • The Monthly Report should contain the information set out in the attachment and be available within 10 days of the end of each month. GBRW Can provide examples. • The meetings of the Board of Directors should be scheduled so that the Monthly Report for the previous month is available to them GBRW Limited, London 73
  74. 74. Module 11 Risk Management
  75. 75. Basle II Now a standard banking requirement of all supervisors worldwide. It has 3 pillars: 1. Minimum capitalisation to cover the 3 main risks faced by banks: credit, market and operational risk. 2. The regulatory response to the first risk 3. Market discipline and disclosure requirements What it means is that all banks have: – To have an independent Risk Management Division (RMD) that identifies, measures and then controls credit, market and operational risk. – Sufficient capital to cover each of these risks (this means more capital than you have already) 75GBRW Limited, London
  76. 76. Chief Risk Officer (CRO) • Head of the Risk Management Division. • GBRW can provide Job Descriptions for all key roles in a bank. • Possibly the most difficult job in the bank as it requires considerable knowledge, tact and courage. Their job is to put first the needs of all the stakeholders of the bank and the customer second. The role of the Board of Directors is to ensure that the bank has an independent and strong CRO who can balance the security of the bank with the need to make profits GBRW Limited, London 76
  77. 77. Credit Risk • The RMD has to approve all corporate, retail and treasury lending limits from the point of view of the security and safety of the bank. • It is easy and safe to say “no” to lending proposals but then the bank will not make any money. • This can be a source of conflict with the Front Office Division. • The CRO must have the full support and confidence of the CEO and the Board of Management. GBRW Limited, London 77
  78. 78. Side issue: how to decline credit • When the RMD or the Credit Committee decline a lending proposal, they should give 3 reasons. One of those may be gut feel “I just don’t like the proposal” but two should be banking reasons. • This is so that the Business Development Officer can go back to the customer with reasons for saying “no” and not just say “no”. A good number of proposals, maybe 30%, will come back in an acceptable format and you have gained a good customer and a happy Business Development Officer • In the same way the RMD or the Credit Committee should not give conditions to approving credit. Credit approval is not a negotiation, that is the role of the Business Development Officer. You should either say “yes” or “no” and give 3 reasons. • It is a lot easier if the bank provides Business Development Guidelines. Proposals can be compared with the guidelines and “3 strikes and you are out”, GBRW Limited, London 78
  79. 79. Examples of market risk additional to those in attached job description of CRO • Interest Rate Risk: bank makes fixed rate loans funded by floating rate deposits. How much does the bank loose if interest rates rise by 2%? • Exchange Rate Risk: bank makes loans in Euro funded by US$ deposits. Who fills the funding gap if the value of the US$ falls by 10% against the Euro? The cost of the additional funding can’t be passed onto the customer. • Value at Risk: how much might the bank loose if the value of its investments fall? A failure in market risk is the greatest danger faced by the Bank. Without adequate funding and liquidity the bank will not survive. GBRW Limited, London 79
  80. 80. Operational Risk • This is the risk of losses to the bank arising from inadequate or failed internal processes, people, systems or external events. • The Job Description of the CRO provides a fuller list of the risks to the bank of operating a banking business. • These risks are considerable and usually under-estimated especially: The risk of the IT system of the bank being attacked The reputation and honesty of the bank being questioned • System of “Traffic lights” to monitor operational risk throughout the organisation. • The level of additional capital required to cover these risks may be around 15% of net revenues which is expensive. GBRW Limited, London 80
  81. 81. Question? What can the Board of Directors do to protect the independence of the CRO and enable him/her to make decisions without worrying about their future career in the bank? GBRW Limited, London 81
  82. 82. MODULE 12 What can go wrong and what the Board of Directors can do about it
  83. 83. Reliance on volatile and unreliable funding sources • A major if not the primary reason for bank failures. One of the problems about banking is that you know the maturity date and amount of your liabilities down to the last cent, you can never be sure of the value of your assets, apart from cash which is an expense. • Not paying your liabilities in full and on time is the short route to bankruptcy. • The Board of Directors are heavily reliant on the ALCO to have firm grip on the funding and liquidity of the bank. • They also need to understand these issues when reviewing and approving the Strategic Plan. • It will also form part of the annual Risk Appetite of the Board. The major dangers are reliance on being a “bought money bank” followed by “borrowing short and lending long”. 83GBRW Limited, London
  84. 84. Imprudent loan practices and sector exposure • The classic route to bank failure as a result of poor lending is exposure to property development, in particular speculative property development. Don’t get heavily involved however attractive the proposal may appear. • The Board of Directors can approve the wrong strategy, assuming they were fully aware of what was going on. Whatever way the directors are to blame. GBRW Limited, London 84
  85. 85. A weak Board of Directors not understanding the business • It can be very difficult if the board comprises of amateurs who are not familiar with the business, and only involved for a few days a month, to have a real understanding of the risks being taken by the bank. • Boards need to understand where the profits are coming from, this includes profits from the Treasury and Trading Division • The main protection should be the Chief Risk Officer GBRW Limited, London 85
  86. 86. Be aware of what is happening in the Treasury and Trading Division • The Treasury and Trading Division should be making a substantial contribution to the profitability of the bank, essentially by managing the overall cost of funding the bank and executing foreign exchange transactions for customers. • Traders will need to run short open positions in maturities, currencies, securities and commodities. “Open positions” means “speculation” and banks have lost vast sums as a result of trading losses. Short positions (a few hours) should not become long positions without Risk Management Division approval. • Providing there is a tight control regime, there is a place for limited speculation with the bank’s own money (not client’s money) but beware exceptional profits and trading that cannot be easily explained. • There is a tendency for the Treasury and Trading Division to “blind the rest of the bank with science” so that nobody is really sure what they are doing. The Board of Directors need to make sure that the CEO and the Board of Management are on top of this. GBRW Limited, London 86
  87. 87. What Boards need to do to protect themselves 1. Know and understand their business by being well informed, experienced and able to withstand pressure. 2. Build a culture of prudence and professionalism throughout the bank 3. Foster an absence of greed: profits “yes”, excessive profits “no”. Don’t push management too hard for profits. 4. Push the bank to be sustainable rather than short term, in other words relationships and solidarity are more important than transactions. 5. Ensure a working corporate governance procedure 6. Support an independent and strong Chief Risk Officer 7. Establish an active and real Audit Committee 8. Build an independent Internal Audit Department GBRW Limited, London 87
  88. 88. Module 13 The future of banking?
  89. 89. Competition will always be heavy • Just accept that you will always face heavy competition from other banks, in particular foreign owned banks who will have access to much greater resources than you have, in particular cheaper funding and IT. • The idea is to make your bank: more efficient (cheaper to run), more attractive (customers want to come to you) so secure that nobody ever worries about your future. • This probably means concentrating on standardisation, centralisation and mechanisation. 89GBRW Limited, London
  90. 90. Beware the temptation to concentrate on major companies • All banks naturally want to bank the major companies, they tend to be more credit worthy, the sums involved are much larger and they bring with them some prestige. • However, they are not as reliable as customers and will move to a more competitive bank without much sense of loyalty. • This competitive bank will often be a foreign bank with much greater resources and range of services. • In developed economies, the banks have relatively little lending to major companies as they have been refinanced through the bond market. • Banks should have broad spread of business, maybe think for the Strategic Plan in terms of 4 or 5 major business sectors so that if one goes it will not be a disaster. GBRW Limited, London 90
  91. 91. What most domestic banks do • As they grow and develop, most banks have to gravitate towards retail and smaller corporate business (SME) whilst holding onto as much large corporate/state owned company business as they can. • All banks should provide foreign exchange and trade finance products for customers but they should also think about small ticket leasing, factoring, franchise financing, securities broking, corporate finance, asset management, insurance – quite often through subsidiaries or joint ventures. • Most banks aim to be represented in all cities and most towns in their countries or regions of operation. The problem is that branches are expensive. GBRW Limited, London 91
  92. 92. Cost control • Running a bank is expensive. Operating costs are high because a bank employs a lot of people (and numbers are increasing to satisfy the requirements of the regulators and the need to bring in new products and services). • Keeping a limit on the growth of costs is key. • This can only be achieved by: a) Standardisation of products (tailored facilities are expensive) b) Centralisation of everything that can be centralised in Head Office or Regional Offices (Back Office, Risk Management, Human Resources, IT, etc). c) Branches are marketing units not mini banks. d) Get the customers to do the work: internet banking, telephone banking, filling out their own applications for house loans, consumer credit etc. d) Maximum use of score cards and IT • The biggest expense after staff will be IT (and many banks have either failed to keep up or had to merge with other more advanced banks). GBRW Limited, London 92
  93. 93. Cut out “dead money” • Look at the assets side of the balance sheet and consider how much is earning a return. • Cash is a problem. It has to be counted, insured, transported and held in a secure area. It earns no interest. It is an expense and the holding should be minimised as far as possible. • Fixed assets are also a problem. They earn nothing and, apart from cars, offer no source of swift liquidity in case of need. The funding could be better employed. Consider sale and lease back to free up the cash. • The bank has to have liquidity, which will earn less than loans. It is the job of the Treasury and Trading Division to find secure, liquid markets to place the liquidity of the bank. GBRW Limited, London 93
  94. 94. Banking should be safe • Banking is a utility industry. It provides an essential service to the community. • To be consistently profitable it has to be a volume business, delivering standard products efficiently and cheaply. • Avoid the exotic and “once in a lifetime” proposals. They are too good to be true. • Everybody in the bank should aim to have a good nights sleep without worry and concern, especially the members of the Board of Directors and the CEO (and the CRO). GBRW Limited, London 94
  95. 95. Module 14 GBRW Limited
  96. 96. GBRW Limited GBRW is a banking consultancy based in London. It is staffed entirely by former senior bankers. GBRW would welcome the opportunity to better understand your interests and needs relating to the issues raised in this document. Please contact us through jeremy.denton-clark@gbrw.com or calling our London Head Office on 00 44 (0) 20 7382 99000. To find out more about GBRW please go to www.gbrw.com.

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