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Chapter 7
Private Banking
The Presentation Slides for Teaching
Financial Regulations and Compliance Practices
Website : ht...
Declaration
Copyright © 2016 CapitaLogic Limited.
All rights reserved. No part of this presentation file may be
reproduced...
Outline
What is private banking?
Private banking services
Selling of investment products
Copyright © 2016 CapitaLogic Limi...
Private banking
Regulatory definition
Maintain personalized relationship
Receive personalized banking services
Minimum USD...
Wealth pyramid
Private banking
Wealth management
Copyright © 2016 CapitaLogic Limited 5
Wealth segmentation of
private banking customers
Copyright © 2016 CapitaLogic Limited 6
Source of wealth
Copyright © 2016 CapitaLogic Limited 7
Why private banking?
– customer’s perspective
HNWIs have too much money
Safety custodian of wealth
Protection against infl...
Why private banking?
– bank’s perspective
Copyright © 2016 CapitaLogic Limited 9
Why private banking?
– bank’s perspective
Good profit = Higher income - Lower cost
Low regulatory capital requirements
Bus...
Incomes
Product service charges
Commissions (from investment banks)
Management fee
Custodian fee
Loan interests
Other serv...
Regulatory capital
Funding from a bank’s shareholders
Operational risk capital charge
1.2% of transaction amount
Credit ri...
Business referrals from
private banking customers
Copyright © 2016 CapitaLogic Limited 13
Relationship manager
“ ”Copyright © 2016 CapitaLogic Limited 14
No. of customers serviced by one
relationship manager
Copyright © 2016 CapitaLogic Limited 15
Relationship years
Copyright © 2016 CapitaLogic Limited 16
Outline
What is private banking?
Private banking services
Selling of investment products
Copyright © 2016 CapitaLogic Limi...
Major private banks in Hong Kong
The Hong Kong and Shanghai Banking
Corporation Limited
Hang Seng Bank Limited
Standard Ch...
Major private banks in Hong Kong
UBS AG
Credit Suisse AG
The Bank of East Asia, Limited
BNP Paribas Wealth Management
DBS ...
Copyright © 2016 CapitaLogic Limited 20
Copyright © 2016 CapitaLogic Limited 21
Investment classes
Copyright © 2016 CapitaLogic Limited 22
Alternative investments
Real estates
Commercial real estates
Private equities
Initial private offer
Commodities
Red wine
D...
HKD 700,000
Copyright © 2016 CapitaLogic Limited 24
Collateralized lending
0
1
2
3
4
5
6
7
8
9
10
Collateral Lending
7 7
3
Copyright © 2016 CapitaLogic Limited 25
First collateral
1,000,000
HSBC shares
Copyright © 2016 CapitaLogic Limited 26
Frist collateral + first loan
1,000,000
700,000
HSBC shares
Loan
Copyright © 2016 CapitaLogic Limited 27
First collateral + first investment
1,000,000
700,000
HSBC shares
Tenscent shares
Copyright © 2016 CapitaLogic Limited 28
First collateral + first investment
+ second loan
1,000,000
700,000
490,000
HSBC shares
Tenscent shares
Loan
Copyright © 2...
Leverage effect
2 3
1,000,000 + 1,000,000 × 0.7
+ 1,000,000 × 0.7 + 1,000,000 × 0.7 +
1,000,000
=
1 - 0.7
= 3,333,333
⋅⋅⋅
...
Professional investor
An individual with a portfolio of at least USD 1 mn
A corporation with a sole business to hold inves...
Outline
What is private banking?
Private banking services
Selling of investment products
Copyright © 2016 CapitaLogic Limi...
Regulatory challenges
to private banking
Copyright © 2016 CapitaLogic Limited 33
What is this investment product?
Excellent investment product
High return
Low risk
Huge growth potential
Very stable incom...
What is this investment product?
Very popular investment product
Mr. FONG acquired HKD 100,000 yesterday
Mr. LEE further b...
What is this investment product?
Today the market is going up
The price will be more expensive tomorrow
Copyright © 2016 C...
What is this investment product?
Today the market is going down
The price is very attractive today
Copyright © 2016 Capita...
Sure win selling strategy
HKD 100 ParknShop gift coupon for every
HKD 100,000 subscription
Copyright © 2016 CapitaLogic Li...
Very familiar conversions
Copyright © 2016 CapitaLogic Limited 39
Whom are you talking with?
Copyright © 2016 CapitaLogic Limited 40
Regulatory requirements
An financial institution is subject to RA8 asset
management when selling investment products
A fin...
Regulatory requirements
Product due diligence
Customer risk profiling
Suitability assessment
On-going monitoring
Crisis ma...
Product due diligence
Product risk rating: a number from low to
high, classifying the consolidated risk of an
investment p...
Risk rating of common products
Product Level
Deposits 1
Government bonds 1 to 2
Corporate bonds 2 to 3
Currency linked dep...
Product rating of RMB bonds
Copyright © 2016 CapitaLogic Limited 45
Regulatory product risk factors
SFC’s key facts statement
http://www.sfc.hk/web/EN/regulatory-
functions/products/product-...
Product risk assessment
Qualitative
Expert judgment
Subjective
Time consuming
Less consistent
Very flexible
Quantitative
M...
Quantitative product
risk assessment (1)
Market risk
Currency rate, interest rate, equity price and/or commodity price
Vol...
Quantitative product
risk assessment (2)
Reputation risk
Strategic risk
Using minimum rating
Qualitative factors
Industry ...
Minimum risk level
Money market fund 1
Fixed income fund 2
Balanced fund 3
Equity fund 4
Hedge fund 5
Copyright © 2016 Cap...
Calibration products
1 – US treasury fund
2 – Fixed income fund
3 – Half fixed income fund + Half equity fund
4 – Blue chi...
Peer comparison
HSBC
Hang Seng Bank
DBS(HK)
Wing Lung Bank
Wing Hang Bank
Bank of
Communications
ICBC(Asia)
ANZI(HK)
Copyr...
Point-in-time vs through-the-cycle
Copyright © 2016 CapitaLogic Limited 53
Customer risk profiling
A questionnaire with 6 to 12 questions to
assess risk tolerance level of a customer, e.g.
1 – Cons...
Tolerance level factors
Income +
Employment +
Assets +
Liabilities -
Investment experience +
No. of dependents -
Education...
Copyright © 2016 CapitaLogic Limited 56
Copyright © 2016 CapitaLogic Limited 57
Suitability assessment
Suitablity
assessment
Product
Product risk
level
Product
features
Customer
Risk tolerance
level
Kno...
Suitability assessment
Product risk rating vs risk tolerance level
Product features vs customer characteristics
Investment...
On-going monitoring
Product based monitoring
Typically over 1,000 products
Very difficult and time consuming
Market based ...
Crisis management
Crisis management committee
Working group meeting
Action plan
Close monitoring
Keep on close monitoring
...
Reference
HKSI, 2016. CPWP M2 – Ethics and
Compliance Study Guide.
Copyright © 2016 CapitaLogic Limited 62
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Chapter 7 private banking

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Chapter 7 private banking

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Chapter 7 private banking

  1. 1. Chapter 7 Private Banking The Presentation Slides for Teaching Financial Regulations and Compliance Practices Website : https://sites.google.com/site/quanrisk E-mail : quanrisk@gmail.com Copyright © 2016 CapitaLogic Limited
  2. 2. Declaration Copyright © 2016 CapitaLogic Limited. All rights reserved. No part of this presentation file may be reproduced, in any form or by any means, without written permission from CapitaLogic Limited. Authored by Dr. LAM Yat-fai (林日辉林日辉林日辉林日辉), Principal, Structured Products Analytics, CapitaLogic Limited, Adjunct Professor of Finance, City University of Hong Kong, Doctor of Business Administration (Finance), CFA, CAIA, CAMS, FRM, PRM. Copyright © 2016 CapitaLogic Limited 2
  3. 3. Outline What is private banking? Private banking services Selling of investment products Copyright © 2016 CapitaLogic Limited 3
  4. 4. Private banking Regulatory definition Maintain personalized relationship Receive personalized banking services Minimum USD 1 mn liquid assets under the bank’s management or Minimum USD 3 mn liquid assets Operational definition A bank officer visits a customer’s office to conduct banking transactions for the customer Copyright © 2016 CapitaLogic Limited 4
  5. 5. Wealth pyramid Private banking Wealth management Copyright © 2016 CapitaLogic Limited 5
  6. 6. Wealth segmentation of private banking customers Copyright © 2016 CapitaLogic Limited 6
  7. 7. Source of wealth Copyright © 2016 CapitaLogic Limited 7
  8. 8. Why private banking? – customer’s perspective HNWIs have too much money Safety custodian of wealth Protection against inflation Capital appreciation Tax avoidance and/or deferral Estate planning Social status Copyright © 2016 CapitaLogic Limited 8
  9. 9. Why private banking? – bank’s perspective Copyright © 2016 CapitaLogic Limited 9
  10. 10. Why private banking? – bank’s perspective Good profit = Higher income - Lower cost Low regulatory capital requirements Business referral from PB customers Corporate decision makers Other high net worth individuals Copyright © 2016 CapitaLogic Limited 10
  11. 11. Incomes Product service charges Commissions (from investment banks) Management fee Custodian fee Loan interests Other service charges Copyright © 2016 CapitaLogic Limited 11
  12. 12. Regulatory capital Funding from a bank’s shareholders Operational risk capital charge 1.2% of transaction amount Credit risk capital charge 0% for lending with full collateral 8% for lending without collateral Copyright © 2016 CapitaLogic Limited 12
  13. 13. Business referrals from private banking customers Copyright © 2016 CapitaLogic Limited 13
  14. 14. Relationship manager “ ”Copyright © 2016 CapitaLogic Limited 14
  15. 15. No. of customers serviced by one relationship manager Copyright © 2016 CapitaLogic Limited 15
  16. 16. Relationship years Copyright © 2016 CapitaLogic Limited 16
  17. 17. Outline What is private banking? Private banking services Selling of investment products Copyright © 2016 CapitaLogic Limited 17
  18. 18. Major private banks in Hong Kong The Hong Kong and Shanghai Banking Corporation Limited Hang Seng Bank Limited Standard Chartered Bank (Hong Kong) Limited Bank of China (Hong Kong) Limited BoC International Limited Goldman Sachs (Asia) L.L.C. Morgan Stanley Asia International Limited JP Morgan Chase Bank, National Association Copyright © 2016 CapitaLogic Limited 18
  19. 19. Major private banks in Hong Kong UBS AG Credit Suisse AG The Bank of East Asia, Limited BNP Paribas Wealth Management DBS Bank (Hong Kong) Limited Deutsche Bank AG Industrial and Commercial Bank of China (Asia) Limited Nomura International (Hong Kong) Limited Copyright © 2016 CapitaLogic Limited 19
  20. 20. Copyright © 2016 CapitaLogic Limited 20
  21. 21. Copyright © 2016 CapitaLogic Limited 21
  22. 22. Investment classes Copyright © 2016 CapitaLogic Limited 22
  23. 23. Alternative investments Real estates Commercial real estates Private equities Initial private offer Commodities Red wine Distressed debts Cyprus sovereign debts Hedge funds Quantum fund Copyright © 2016 CapitaLogic Limited 23
  24. 24. HKD 700,000 Copyright © 2016 CapitaLogic Limited 24
  25. 25. Collateralized lending 0 1 2 3 4 5 6 7 8 9 10 Collateral Lending 7 7 3 Copyright © 2016 CapitaLogic Limited 25
  26. 26. First collateral 1,000,000 HSBC shares Copyright © 2016 CapitaLogic Limited 26
  27. 27. Frist collateral + first loan 1,000,000 700,000 HSBC shares Loan Copyright © 2016 CapitaLogic Limited 27
  28. 28. First collateral + first investment 1,000,000 700,000 HSBC shares Tenscent shares Copyright © 2016 CapitaLogic Limited 28
  29. 29. First collateral + first investment + second loan 1,000,000 700,000 490,000 HSBC shares Tenscent shares Loan Copyright © 2016 CapitaLogic Limited 29
  30. 30. Leverage effect 2 3 1,000,000 + 1,000,000 × 0.7 + 1,000,000 × 0.7 + 1,000,000 × 0.7 + 1,000,000 = 1 - 0.7 = 3,333,333 ⋅⋅⋅ Copyright © 2016 CapitaLogic Limited 30
  31. 31. Professional investor An individual with a portfolio of at least USD 1 mn A corporation with a sole business to hold investments and is wholly owned by an individual who has a portfolio of at least USD 1 mn A trust with total assets of at least USD 1 mn A corporation or partnership with either a portfolio of at least USD 1 mn or total assets of at least USD 5 mn A professional investor is not protected by the SFO protected by contract law Copyright © 2016 CapitaLogic Limited 31
  32. 32. Outline What is private banking? Private banking services Selling of investment products Copyright © 2016 CapitaLogic Limited 32
  33. 33. Regulatory challenges to private banking Copyright © 2016 CapitaLogic Limited 33
  34. 34. What is this investment product? Excellent investment product High return Low risk Huge growth potential Very stable income As reliable as deposits Copyright © 2016 CapitaLogic Limited 34
  35. 35. What is this investment product? Very popular investment product Mr. FONG acquired HKD 100,000 yesterday Mr. LEE further brought HKD 500,000 this morning Limited offer to very few VIPs like you Subscription to be closed by this end of today Copyright © 2016 CapitaLogic Limited 35
  36. 36. What is this investment product? Today the market is going up The price will be more expensive tomorrow Copyright © 2016 CapitaLogic Limited 36
  37. 37. What is this investment product? Today the market is going down The price is very attractive today Copyright © 2016 CapitaLogic Limited 37
  38. 38. Sure win selling strategy HKD 100 ParknShop gift coupon for every HKD 100,000 subscription Copyright © 2016 CapitaLogic Limited 38
  39. 39. Very familiar conversions Copyright © 2016 CapitaLogic Limited 39
  40. 40. Whom are you talking with? Copyright © 2016 CapitaLogic Limited 40
  41. 41. Regulatory requirements An financial institution is subject to RA8 asset management when selling investment products A financial institution is fully responsible for mis-selling of investment products A financial institution is required to implement a compliance programme to prevent mis- selling of investment products Copyright © 2016 CapitaLogic Limited 41
  42. 42. Regulatory requirements Product due diligence Customer risk profiling Suitability assessment On-going monitoring Crisis management Copyright © 2016 CapitaLogic Limited 42
  43. 43. Product due diligence Product risk rating: a number from low to high, classifying the consolidated risk of an investment product, e.g. 1 – Conservative 2 – Balanced 3 – Moderate 4 – Growth 5 – Aggressive Copyright © 2016 CapitaLogic Limited 43
  44. 44. Risk rating of common products Product Level Deposits 1 Government bonds 1 to 2 Corporate bonds 2 to 3 Currency linked deposits 2 to 3 Equity linked notes 4 to 5 Credit linked notes 5 Copyright © 2016 CapitaLogic Limited 44
  45. 45. Product rating of RMB bonds Copyright © 2016 CapitaLogic Limited 45
  46. 46. Regulatory product risk factors SFC’s key facts statement http://www.sfc.hk/web/EN/regulatory- functions/products/product-authorization/products- key-facts-statements.html HKMA’s important facts statement http://www.hkma.gov.hk/media/eng/doc/key- information/guidelines-and- circular/2011/20110418e1.pdf Copyright © 2016 CapitaLogic Limited 46
  47. 47. Product risk assessment Qualitative Expert judgment Subjective Time consuming Less consistent Very flexible Quantitative Model based Objective Automated Consistent Less flexible Copyright © 2016 CapitaLogic Limited 47
  48. 48. Quantitative product risk assessment (1) Market risk Currency rate, interest rate, equity price and/or commodity price Volatility Credit risk Credit rating of issuer and/or custodian Operational and legal risks Complexity of product structures No derivatives Derivatives are used for hedging only Derivatives are used for profit making Liquidity risk A lot of investment products, once invested, must be held until maturity Copyright © 2016 CapitaLogic Limited 48
  49. 49. Quantitative product risk assessment (2) Reputation risk Strategic risk Using minimum rating Qualitative factors Industry consents Regulatory expectations Copyright © 2016 CapitaLogic Limited 49
  50. 50. Minimum risk level Money market fund 1 Fixed income fund 2 Balanced fund 3 Equity fund 4 Hedge fund 5 Copyright © 2016 CapitaLogic Limited 50
  51. 51. Calibration products 1 – US treasury fund 2 – Fixed income fund 3 – Half fixed income fund + Half equity fund 4 – Blue chip equity fund 5 – Statistically sufficiently above “4” Copyright © 2016 CapitaLogic Limited 51
  52. 52. Peer comparison HSBC Hang Seng Bank DBS(HK) Wing Lung Bank Wing Hang Bank Bank of Communications ICBC(Asia) ANZI(HK) Copyright © 2016 CapitaLogic Limited 52
  53. 53. Point-in-time vs through-the-cycle Copyright © 2016 CapitaLogic Limited 53
  54. 54. Customer risk profiling A questionnaire with 6 to 12 questions to assess risk tolerance level of a customer, e.g. 1 – Conservative 2 – Balanced 3 – Moderate 4 – Growth 5 – Aggressive Copyright © 2016 CapitaLogic Limited 54
  55. 55. Tolerance level factors Income + Employment + Assets + Liabilities - Investment experience + No. of dependents - Education ? Age ? Copyright © 2016 CapitaLogic Limited 55
  56. 56. Copyright © 2016 CapitaLogic Limited 56
  57. 57. Copyright © 2016 CapitaLogic Limited 57
  58. 58. Suitability assessment Suitablity assessment Product Product risk level Product features Customer Risk tolerance level Know your customer Copyright © 2016 CapitaLogic Limited 58
  59. 59. Suitability assessment Product risk rating vs risk tolerance level Product features vs customer characteristics Investment horizon Investment objective Specific product knowledge Specific market experience Concentration of exposures Copyright © 2016 CapitaLogic Limited 59
  60. 60. On-going monitoring Product based monitoring Typically over 1,000 products Very difficult and time consuming Market based monitoring Major currency rates Major interest rates Major equity indices Major volatility indices Major credit indices Credit rating of 10 largest counterparties Copyright © 2016 CapitaLogic Limited 60
  61. 61. Crisis management Crisis management committee Working group meeting Action plan Close monitoring Keep on close monitoring Further close monitoring Suspend selling risky products Inform customers who have acquired risky products Copyright © 2016 CapitaLogic Limited 61
  62. 62. Reference HKSI, 2016. CPWP M2 – Ethics and Compliance Study Guide. Copyright © 2016 CapitaLogic Limited 62

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