At.risk.in.consumer banking

Mohammad Fheili ⌂ mifheili@gmail.com ⌂ +(961) 03 33 71 75
Workshop
a Performance Enhancer
AssociationofBanksinLebanon
July 5th & 6th of 2017
The Key ApartHotel
Beirut – Lebanon
1st
Encounter
OrganizedBy:

Workshop
“Over 30 years of Experience in Banking.
mifheili@gmail.com (961) 3 337175
Facilitator’s Biography
 Risk & Capacity Building Specialist.
 Trainer in Risk & Compliance
 University Lecturer: Economics, Risk, and Banking
Operations
 Currently serves in the capacity of an Executive (AGM) at
JTB Bank in Lebanon.
Served as:
 Senior Manager & Chief Risk Officer at Group
Fransabank
 Senior Manager at BankMed
 An Economist at the Association of Banks in
Lebanon
 Mohammad received his college education
(undergraduate & graduate) at Louisiana State University
(LSU), and has been teaching Economics and Finance for
over 25 continuous years at reputable universities in the
USA (LSU) and Lebanon (LAU).
 Finally, Mohammad published over 25 articles, of those
many are in refereed Journals (e.g., Journal of Money
Laundering & Control; Journal of Operational Risk;
Journal of Law & Economics; etc.) and Bulletins.”

Workshop
Module 1
Consumer Banking…
Risk Is here To Stay…!

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Part I:
Introduction
How Often Do You Incorporate Risks Into Your Decisions:
a) Every Decision
b) Never
c) Only When I Need to

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Main Focus of the Workshop: Risk & Performance
?
 Risk- & Compliance-Driven Performance in Consumer Banking.
 Understanding Risk & Compliance From The Vantage Point of
Branch Responsibles.
 To Enhance Participants’ Knowledge of Risks, Regulations
and Compliance to Drive Better Performance in Branches.
 Transforming Regulatory Complexity into an Every Day
Performance Language.

Workshop
1. INTRODUCTION
 The Consumer Banking Landscape: Past, Present, and Future Outlook.
2. CHANGES & CHALLENGES IN CONSUMER BANKING
3. RISKS & REGULATIONS: ARE BRANCHES CONCERNED?!
 Risks: How to Identify, Assess, and Manage Risks at the Branch Level.
 Risks as should be spoken by the Branches
 The Credit Approval Process and Credit Risks
 Operational Risks: Branches are at the forefront of Operational Risks
 The Critical Importance of Reporting Operational Risk Events
 How to leverage AML Compliance for a better customer service.
 Regulations & Compliance
 How Should The Branch Read Regulations & Compliance?
 The Basel Accord Made Simple.
 The Benefits behind Collecting Accurate, Up‐To‐Date and Complete Data for
“Reporting Requirements” – FATCA, CRS, etc.
4. OTHER TOPICS IN CONSUMER BANKING
5. CASES AND EXERCISE
Detailed Outline of the Workshop . . .

Workshop
Key Issues to Tackle . . .
AML & the Risk of Non‐
Compliance
Branch Personnel Management
& HR Risk
The Credit Approval Process &
The Credit Risk Environment
The Banking Model & How
Should The Branch Maneuver
Liquidity, & How can the Branch
Help.
Between Risk Management &
Compliance.
Special Topics To Discuss . . .
Customer Complaints & The
Angry Client.
Complaints versus Objections
Service Quality is “Perception
Dependent”!
Understanding Customer
Behavior
The Digital Channels &
Cybercrime.
Shape Your Risk Culture!
DetailedOutlineoftheWorkshop

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YOURSELF
Hunter?
Farmer?
In ONE Minute (Please)
1. Your Name
2. Your Current Job
3. Years in Banking
4. Your Expectations?
Introduce

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ConsumerBanking
Introducing . . .

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The Weight
Of Consumer Banking in a Commercial Bank!

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 The Customer is at the Heart of Consumer
Banking
 Knowing the Customer and Driving
Profitability Through This knowledge is the
Lifeblood of Consumer Banking (and the
Entire Bank).
Facts
About Consumer Banking1
K.Y.C. is a Blessing Not a Curse!
Look For The Added Value in AML Compliance!

Workshop
Consumer Banking:
 Is the Biggest Employer in any Typical
Banking Organization
 Is the Most Active Processor of Transactions
(i.e., Traffic) in any Typical Banking
Organization
 Has the Highest Utilization Rate of IT Systems
in any Typical Banking Organization
 Drives Profitability
Facts
Operational Heaven or Hell . . . !
Identifying and reducing Operational Risk MINIMIZES [unnecessary] Costs and IMPROVES Efficiency

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 Branches & Branch Staff Have Been
Marginalized in the Identification,
Assessment and Management of Risks!
 Branches & Branch Staff Are The First Line
Of Defense and they must be equipped
with the knowledge and tools to
effectively deal with Risks…
Facts
A Branch Staff Could be an Asset or a Liability!
Most likely, IF the Branch did not (pay attention to) see it, no one else in the Bank would (in due time)!

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Part II:
Changes & Challenges
? ?

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Information
Technology
Customer
Expectations
Law &
Regulations
Risks
Shadow
Banking
1
2
3 4
5
6
Changes & Challenges Landed Heavily . . . !
Equipped To
Compete

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Changes & Challenges Are
Important Because They
Have Implications!
Implications on What?

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Information Technology
 The Introduction of any form of technology in a given production process
or the mere modification of an existing IT environment necessitates a
number of changes:
Staff Skills,
Workflows,
Policies & Procedures, and
a host of other changes.
Which reflects on Performance…
IT RiskModel Risk Cyber Risk
Risk Inter
dependency
Data
Collection,
Processing,
& Storage
1/6

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Increased Usage
of Impersonal
Electronic
Services Low Cost
Electronic
Services
Lower Customer
Intimacy: Clients
Have Been
Digitized…
Reduced
Switching Costs
Between Banks
Customers are
constantly
shopping for
better deals
Increased
Demand for
Transparency
Need to
Leverage all
Customer ‘Touch
Points’Customer
Interest peaks &
falls rapidly
Less Time to
Know and
Influence
CustomersProliferation of
Channels to
Service The
Client
Technology
Technology
Technology
Technology
1/6

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Between
Humanizing “The Technology’ & Digitizing “The Human-Client!”
Technology Altered Our Existence
1/6

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We’re Surely Evolving . . . !
1/6
 Automated Processes
 Data‐Rich Decision
Processes
 IT abundant skill sets
 Complex Products &
Services
 E‐Banking
 M‐Banking
 E‐Payments
 Etc.
We like to convince ourselves that “Technology” is (or Has)
the Solution to Everything.
Technology ONLY Changed the Process/Transaction but
NOT the Person.
A.I.

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Are You Convinced that we have been evolving in that fashion?
IF YES, then the extreme majority of anticipated/undertaken projects is
about “Automation”, and/or IT Solutions….
RESULTING in:
1. Increasing Demands for IT skills,
2. Technical skills is favored over soft skills
3. Talent Development potentially biased
4. etc.
The Absence of Such Technical Skills will reflect Negatively on the success of the
majority of projects, and introduce an element of heightened Risks in the
successful Completion of Planned Projects…
Are There More!
4th Industrial
Revolution:
which is
characterized by
the fusion of
technologies
blurring the
lines between
the physical,
digital, and
biological
spheres.
A.I.

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Traditional Banking
People
Come
First
Data‐
Dependent
1/6
The Data/Information about a Client Must Be Complete, Stored in a
Processable Format, and Continuously Updated, and readily
available on the Bank’s Core Banking System.

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Not By Choice . . .
Data is Critical . . .
Data Warehouses is needed . . .
Etc….
A Data warehouse is a good idea, but a warehouse only
works when Staff bother to make deliveries into it!
 That’s where Branch Staff need some sharp Inter‐
Personal communication skills, to persuade clients to
share their data.
 Without the Right/Complete/Timely Data, [all] Risk
Decisions are Ambiguous, Ignorant, or Uncertain!
1/6
[all] “Client Information” must be Quantifiable, Objective, and stored in a manner which
permits processing to assist in Decision Making…
With Technology invading practically every process, Decision‐Making has turned Technology‐
Intensive & Data‐Rich.
Decision-Making Processes Embraced Technology

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1/6

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Risks (Intentional &
Unintentional)
Known to The
Financial
Institution . . . With
continuous efforts
to Identify more
Non‐Identifiable Risk
Non‐Identifiable Risk
Financial Institution’s Risk/Data Population
What is Normally Used in
Risk Identification:
• CIP
• KYC
• DD
• EDD
• Complete and Up‐To‐
Date Credit File,
• Client Visits.
• Proper Follow Up
• Comprehensive &
Consistent Data about
the Market
• Etc.
Identified &
Identifiable
Risks
• Expected Losses are
normally controlled or
met using Gross Income,
• While Unexpected
Losses require Capital.
There Is A Close (and non‐linear) Link Between The Identified
Risks & The Data To Be Collected . . .
1/6
The More Data You Collect, The More Risks will be
identified, The better Understanding You will have, . . .

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Increasing Our Understanding of Potential Outcomes
(i.e., Impact)
Increasing Evidence on Probability of
occurrence (i.e., Probability)
Ambiguity
Uncertainty
Ignorance
The Right Data Helps You Discriminate Between Ambiguity,
Ignorance , Uncertainty and Risk Management . . .
991/6

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Compliance
ResourcesDeployed
DD
EDD
RBA
IF THERE is a clear signal on the part of the Bank to continue on serving the client, more
data will be collected and processed to identify, measure and manage RISKS (i.e., Comply).
Due
Diligence
Enhanced Due
Diligence
Risk‐Based Approach to AML
Compliance
Enhancing Compliance Capabilities …
AML Cost
Skills Needs
Know‐How
AML Analytics
Exercise: New Client . . . Account Opening
Collecting, Storing, and Processing Data is a Conscious Decision … NOT A RANDOM
EVENT on the Corporate Landscape.
New Client
There Is A Close, non‐linear Link
Between The Identified Risks &
The Data To Be Collected.

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Changing Customer Expectations and the Power to Punish
 If you don’t Duly respond, some other Banks will; since
the Cost of ‘Switching’ is negligent.
 Harnessing big data analytics, social media monitoring and
other new forms of insight to anticipate and respond
proactively to changing customer demands..
 Gain clearer line of sight to customers, speed up decision
making and overcome institutional resistance to change.
 Shift from product‐push to customer solutions.
 Accent on product specialization (‘depth’) gives way to
broader engagement, analytical and change management
skills (‘Breadth’).
2/6

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Survey Says…It means ONE THING: Invest More Time In understanding Clients.
Customer Says: Yes I CAN PUNISH …
 50% of service agents fail to answer customer questions
appropriately.
 66% of customers went to a competitor due to bad service.
 70% of the buying experience is based on the way customer feel
they are being treated.
 73% of customers cite incompetent and rude customer support.
 75% of customers say it takes too long to reach a live person for
help.
 86% of customers will not buy from a company with ‘Online
Negative Reviews’.
 87% of companies are at elementary levels related to the quality of
their customer experience.
 96% of customers don’t actually tell a company about their
complaints
 25% of all customers have some level of complaint at any one time.
 95% of unhappy customers tell others and will tell three times as
many people as happy customers.
2/6

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Laws & Regulations
Legal Obligation
The Public at Large has the Right to
Know!
Where its impact on the Financial
Institution’s Reputation and
Performance is often severe.
Profitability suffers, and it triggers
immediate additional expenses for
Damage Control.
And it may lead to ‘Total Shutdown’!
Regulator Obligation
Issues of non‐compliance
are usually handled inside
closed doors directly with
the Regulators.
3/6

Workshop
 Law 318 – AML and ….
 Law 42 – Cash Across Borders and Declaration
 Law 43 – Exchange of Tax Information
 Law 44 – AML and Counter Financing of Terrorism
 Law 53 – International Convention for the Suppression of the Financing
of Terrorism
BDL Basic Circulars 83 – Regulator’s Version of Law 318, and
BDL Intermediate Circular 371 – Compliance Officer at P.O.S.
BDL Basic Circular 81 on Credit Risk – Compared to BDL Basic Circular 58)
Increased the Demand for Transparency
 BDL Basic Circular 134; and
 BCCL Circular 281)
Etc…. Reporting (FATCA, CRS, IFRS 9, ….)
Laws & Regulations
3/6

Workshop
• Opened his [ALL LEGAL] Pharmacy 3 years ago in a
village in the far North of Lebanon, and today it
turnovers over $ 2 million a year, and netting no less
than 15% in Annual Profits.
• Imad enjoys:
• A clean operations since he is the only
pharmacist within 100km radius, and all his
money is in Bank Accounts at a Bank located in
the nearest town,
• Operating like a Shadow‐MD: He examines
certain cases and charges for consultation!
• A Tax‐Free operations since he has not paid a
penny in taxes so far.
• After the recent Municipal Election, Law & Order is
slowly but surely coming to the town and in Full
Speed.
• Imad stopped by YOUR BRANCH this morning to
request a $250,000 Overdraft.
1. Is this strictyly a ‘Credit Decision’?
2. Would You (Imad’s Banker) Grant Him
The Facility?
a) Yes?
b) Conditional Yes!?
c) No, But . . .!?
d) No?
Exercise: Serving the SMEs and Licensed Professionals
Imad is a Licensed Pharmacist with A Good Turnover.

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Laws &
Regulations
Sustainable
Customers
Bank&
BankStaff
Service & Service Excellence
is subject to:
Regulatory Constraints
And Non‐Compliance is Prohibitively
Costly.
3/6

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Shadow Banking . . .
4/6
Borrowers
Deficit Spending
Units ‐DSUs
• Individuals (Current
Income is LESS than Current
Expenditures)
• Firms (Earnings falls short of
what the firm needs currently)
• Government (Current
Revenues fall short of planned
Expenditures)
• Financial
Intermediaries (Funding
is currently LESS than
investment)
With intermediation in Both
Without
Intermediation
Shadow Banking
Replicates
“Intermediation” in
the Banking Model
But . . .
Lenders
Surplus Spending
Units ‐SSUs
• Individuals (Current
Income is GREATER than
Current Expenditures)
• Firms (Earnings in excess of
what the firm needs currently)
• Government (Current
Revenues are in excess of
planned Expenditures)
• Financial
Intermediaries (Funding
is currently GREATER than
investment)
This is where SSUs warehouse their Surplus of Funds.
This is where DSUs Finance their Deficits in Spending.
Regulated Regulated UN-Regulated
35
36

Workshop
• He made a $10,000 down payment on an $250,000
Apartment under construction and paying
$900/month (28 payments left). Expected Delivery is in
3 years.
• He purchased a Used BMW Car and financed it Directly
from the Used Car Dealer paying $450/month for 24
months (13 Payments Left).
• He still owes STU University $4,000 in tuition, and he
won’t graduate and get his diploma until full payment.
STU gave him a statement to that nature (he
completed all requirements) so he can find a job. The
Deal was he pays his university $250/month until
complete settlement (7 Payments Left).
$900 + $450 + $250 = $1,600
Exercise: This is Marwan’s Partial Net Worth.
Marwan is a Fresh Graduate, and Approached your bank for a $25,000 Personal Loan.
Below is information to help you decide.
• Salary Domiciliation $2,000/Month
• Revolving Credit Card: Limit $5,000 ($3,250
utilized) with Minimum Payment of 5%
(Payments are always on time)
• Personal Loan: $15,000 with $450 Monthly
Payments (3 Payments left)
• He is a Co‐signer on a $20,000 Personal
Loans to His Sister with $676 Monthly
Payments (10 Payments left). His sister is a
saleslady at a Department Store.
$162.50 + $450 = $612.50
What The Banker Know! What The Banker Does NOT Probe About and/or Know!
34

Workshop
Equipped To Compete . . .
The most successful businesses are going much
further by re‐engineering their organizations towards
new ways of meeting customer demands and opening
up new market opportunities. So is your business up
to speed?
 Does your mission embrace the values of the post‐
crisis world?
 Do your organizational capabilities reflect the new
economics of your business?
There is a Need To Change The Rules of Engagement
5/6

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Any Other Changes You Can Think of???
YES, Risks …
and You
Can Stop
A Total Collapse From Happening!
If EVERYONE Keeps His/her Eyes Open…
6/6
The Nature Of Has Changed

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RisksWeIntentionallyTake...
What’sinitForMe?

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Hazards…
UnplannedLosses

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Part III:
Exploring

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Risks,
Regulations,
& Compliance
Should
Branches be
Concerned?
The Driving
Force
Behind
Regulations,
…

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A Boat in the Harbor is Safe, But That is Not What Boats Were Made For
R.I.S.K. Is There For Us To Take . . .

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Risk has been, is, and will always be …
Return
Risk
Speculative Risk
Managing Revenue
Market Risk
Liquidity Risk
FX Risk
Other Risks
Credit RISK The
‘Intentional’
Financial
Risks
 Adverse Selection
 Moral Hazard

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 New Products & Services
 Product sophistications
 New distribution channels
 New markets
 New technology
 Complexity (Interdependencies, data
structures)
 E‐commerce
 Processing speed
 Business volume
 Globalization
 Shareholder and other stakeholder pressure
 Mergers & Acquisitions
 Re‐Organizations
 Staff turnover
 Cultural diversity of staff and clients
 Fast‐ageing of know‐how
 Rating Agencies
 Insurance Companies
 Capital Markets
 Others . . . .
Technological Innovations Have Taken Place at a Rate Faster than Employees &
Regulators Have Been Able to Digest and fully comprehend.
BUT Technology Has Been Altering The Operational Environment!

Workshop
Why Banks
Fail?
If Bankers Have Been Doing Their Jobs Right, Bank Failures would have Not Reached
A Catastrophic Proportions.
THINK of any Single BANKING TRANSACTION …!
 By the time “BANK FAILURES” were discovered, it was impossible
to do away with drastic measures to resolve them!
 Banking weaknesses in most failures were unrecognized in due time because
they were CAMOUFLAGED with the hope that none shall ever be discovered!
INADEQUATE Risk Management
Inadequate Supervision
LAX Governance
ABSENCE of Required Competencies
Inadequate Enforcement of Internal Policies and Procedures.
Severely Deficient Internal Audit & Controls.
LACK of Transparency
Inadequate Disclosure
A Blurry [& Complex] Picture . . .!

Workshop
Return
Risk
Hazard + Others
Managing Costs
Reputation Risks
Operational Risk
Other Risks
Unintentional
Risk
AML RISK
Compliance RISK
 Simply, You Can’t Manage
what You Can’t Measure!
 Thus the Importance of
intimately “KNOWING
YOUR RISKS’.
 Manage “The Causes”;
NOT The Consequences!
Other Types Of Risks Became As Relevant . . .
Return
Risk
Speculative Risk
Managing Revenue
Market Risk
Liquidity Risk
FX Risk
Other Risks
Intentional
Risk
Credit RISK

Workshop
How Do You Approach Risk Identification?
Look At A Typical Banking Organization
e.g.,
Operational
Risk
e.g.,
Strategic
Risk
e.g.,
Credit Risk
in the Credit
File, but …
Board of Directors
With well defined sets of duties &
responsibilities
With well defined sets of
duties & responsibilities
Typical Transaction: Start . . . . (goes through the entire banking organization) . . . End
LOGISTICS
 Information
Technology
 Human Resources
 Administration
 Others
RISK & CONTROL
 Risk Management
 Internal Audit
 Internal Controls
 Inspections
 Others
BANKING
 Retail Banking
 Corporate Banking
 Treasury
 Private Banking
 Others
Support Functions
(Cost Centers)
Business Generators
(Speculative Behavior)

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Module 2
Consumer Banking…

Workshop
Assessment

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Your Life Begins At the End Of
Your Comfort Zone
Coping With a Rapidly Changing Banking
Environment
Your Life Begins At the End Of
Your Comfort Zone

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Credit Risk
Market Risk
Operational Risk
Reputational Risk
Business Risk
Strategic Risk
. . . Other Risks
Stay and
Risk Total
Extinction
Comfort ZoneCoping With
Changes

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It’s About Making Risk Choices
Monitor
Monitor
Monitor
Monitor
Mitigation
Key
Risks
Identified
Risks
Non-
Identified Risks ? ?
Acceptable
Risks
Un‐
Acceptable
Risks
?
Control
Transfer
Avoid!
Finance
Risk Choices are a
function of Resource
Availability and the
Bank’s Appetite for
Risk
Identification Assessment

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Let’s
Elaborate on
RISKs ?
on

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It’s been Pouring
Regulatory
Guidelines Ever since
its inception . . .
Regulations &
Compliance

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The Basel Accord: A Gateway To Understanding Risks in a
Financial Institutions . . .
Basel I
Basel II
Credit Risk
Credit Risk
Market Risk
Operational Risk
1986 proposed
1999 proposed
1988 effective
2007 effective
Basel III
Credit Risk
Market Risk
Operational Risk
Capital Quality
Additional Buffers
Liquidity: LCR, NSFR
2009 proposed
Kick Off in 2011
Amendments
Amendments
Basel 2 ½
Basel 1 ½
Amendments
Basel 3 ½
Basel IV
20_ _ Anticipated
Kick Off in 20_ _
• Capital Requirements
• Liquidity Requirements
• Disclosure Requirements
• National Divergences
• Risk Sensitivity
• Use of Internal Models in
Decision Making
• Total Risks = Credit Plus
Market Risks
• Internal Models Emerged
• Later on, Tier 3 Capital
• Enhanced Pillar 2, 3
• Complex Securitization
obtained higher Risk
Weights.
• Trading Books
Tequila
Crisis
Asian Market
Crisis
Shadow Banking
Crisis

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The Basel Accord: The Capital Adequacy Ratio ‐ CAR . . .
Basel I
Basel II
Credit Risk
Credit Risk
Market Risk
Operational Risk
1986 proposed
1999 proposed
1988 effective
2007 effective
Basel III
Credit Risk
Market Risk
Operational Risk
Capital Quality
Additional Buffers
Liquidity: LCR, NSFR
2009 proposed
Kick Off in 2011Basel 2 ½
Basel 1 ½
Basel 3 ½
Basel IV
20_ _ Anticipated
Kick Off in 20_ _
Tequila
Crisis
Asian Market
Crisis
Shadow Banking
Crisis
Tier 1 Capital + Tier 2 Capital
Risk Weighted Assets
C.A.R. =
Tier 1 Capital + Tier 2 Capital +
Tier 3 Capital
Risk Weighted Assets
C.A.R. =
Capital
Assets
C.A.R. =
Definition of Capital in CAR Changed as did the definition of Risk Weighted Assets.
and it forced a Change in the Business Model
Assets – Liabilities = Net Worth 83

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Pillar 1: Minimum Capital
Requirements
Quantitative
Pillar 2: Supervisory Review
Process
Qualitative
Pillar 3: Market Discipline
Disclosure
BaselAccordFramework
On the Balance
Sheet
Internal & Thorough
Assessment of Risk
Management
Practices
You shouldn’t be afraid
to show the market
(Your Competitors &
Customers) what you’re
doing…
Financial
Figures
Speak
Management
Capabilities It is a
Dare!

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Capital Requirements for
Credit Risk
 Standardized Approach
 Foundation IRB Approach
 Advanced IRB Approach
Market Risk (in line with 1993
& 1996)
 Internal VaR Models
Operational Risk
 BIA – Basic Indicator
Approach
 SA - Standardized Approach
 AMA - Advanced
Measurement Approach
Requirements
Quantitative
More Risk Weights Have
been introduced . . .
More Risk Weights Have
been introduced . . .
Treating Credit Risk
83

Workshop
Basic Indicator
Approach
Standardized
Approach
Advanced Measurement
Approach
Gross Income Loss data
This is not Risk Management! Simply, it
is a way to calculate OR Capital
Charge. It is pure Compliance!
This is Risk Management! The Bank
gathers Loss Data, and decides on the
Appropriate Capital Charge.
Treating Operational Risk

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Regulatory Framework for
Banks
 Internal Capital Adequacy
Assessment Process
(ICAAP) And Risk & Control
Self-Assessment (RCSA)
 Risk Management
Supervisory Review
Process (SRP)
 Evaluation of Internal
Systems of Banks
 Assessment of Risk Profile
 Review of Compliance with
all Regulations
 Supervisory Measures
Process
Qualitative
ICAAP’s Main Analysis:
 How much and what
composition of internal
capital the bank considers
it should hold as
compared with its Pillar I
calculation;
 The adequacy of the
bank’s risk management
processes;
SRP’s Main Focus:
 Review and validate the
Bank’s Findings
Examples of Risks not
captured in Pillar 1:
 Concentration Risk
 Liquidity Risk
 Reputational Risk
 Etc…

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Disclosure
Requirements of Banks
 Transparency for market
participants concerning
the Bank’s Risk Position
(Scope of Application,
Risk Management,
Detailed Information on
own funds, etc.)
 Enhanced Comparability
of Banks
Disclosure
To level the playing (Reporting) field,
Disclosure must comply with the
International Financial Reporting
Standards (IFRS9) and all applicable
Accounting Standards . . .

Workshop
Capital Requirements for
Credit Risk
 Foundation IRB Approach
 Advanced IRB Approach
Market Risk (in line with 1993
& 1996)
 Internal VaR Models
Operational Risk
 BIA – Basic Indicator
Approach
 SA - Standardized Approach
 AMA - Advanced
Measurement Approach
Requirements
Quantitative
Regulatory Framework for
Banks
 Internal Capital Adequacy
Assessment Process
(ICAAP) And Risk & Control
Self-Assessment (RCSA)
 Risk Management
Supervisory Review
Process (SRP)
 Evaluation of Internal
Systems of Banks
 Assessment of Risk Profile
 Review of Compliance with
all Regulations
 Supervisory Measures
Process
Qualitative
Disclosure
Requirements of Banks
 Transparency for
market participants
concerning the Bank’s
Risk Position (Scope of
Application, Risk
Management, Detailed
Information on own
funds, etc.)
 Enhanced
Comparability of
Banks
Disclosure

Workshop
 BANKS will be asked to implement an enterprise‐wide risk
management framework that ties regulatory capital to
economic capital
 BANK CUSTOMERS will need to collect and disclose new
information – and likely will face new risk structures as a result
of increased transparency
 REGULATORS are asked to provide a level playing field as the
Basel Committee’s recommendations are implementing by
legislatures in various countries
Business Implications & Challenges

Workshop
Effects of The Basel Accord
 Need external or Internal
rating to obtain credit
 Face increased
transparency of account
profitability
 Need to collect and
disclose new information
 Face possibility of
reduced service,
standardized products,
higher interest rates
Challenges
 Face new costs resulting
from need to provide
lenders with new timely
information
 Improve lending terms
 Improve connections with
lenders/investors through
enhanced disclosures and
structured debt holder’s
relationship management
 Use Key Performance
Indicators to monitor
performance
 Face requests for better
collateralization
 Manage rating process
Risks
Receive marginal rating,
which could result in:
 Reduced credit lines
 Increased collateral
requirements
 Fewer refinancing
opportunities
 Higher interest and
general costs
 Increased information
requirements
 Comparative
disadvantages with
suppliers and customers if
rating is part of a
prequalification process
CUSTOMERS: Often unable to generate sufficient internal cash flow
to realize all necessary investments

Workshop
Environment
People
Processes
Systems
External
AML
Compliance
Legal

Workshop
Loaded With Operational Risk
Consumer [Branch] Banking:
 Is the Biggest Employer in any Typical Banking
Organization
 Is the Most Active Processor of Transactions (i.e.,
Traffic) in any Typical Banking Organization
 Has the Highest Utilization Rate of IT Systems in any
Typical Banking Organization

Workshop
PRIMARY SECONDARY
PEOPLE
• Employee Fraud / Malice (Criminal)
PROCESSES
• Payment / settlement / delivery risk
SYSTEMS
• Technology investment risk
EXTERNAL
• Legal / Regulatory Risk / Public Liability
• Unauthorized activity / Employee misdeed (Willful)
• Employment Law
• Workforce disruption
• Loss or lack of key personnel
• Documentation or contract risk
• Valuation / Pricing
• Internal / External reporting and compliance
• Project risk / Change management
• Selling Risks
• System development and implementation
• Systems failures
• Systems security breach
• Systems capacity
• Criminal Activities
• Out‐sourcing / Supplier Risk
• In‐sourcing Risks
• Disaster and Infrastructural utilities Failures
• Political and Government Risks
There are no right/wrong answers
here; only “Acceptable” ones. What
is acceptable is very much driven by:
• People’s risk attitudes and
• The Organization’s culture.!
Operational Risk as BCBS Sees it…
80

Workshop
Standardised Approach
Corporate Finance
Trading & Sales
Retail Banking
Commercial Banking
Payment Settlements
Asset Management
Agency Services
Retail Brokerage
1
2
3
4
5
6
7
8
(break-down into business lines)
BL1 Gross income
BL2 Gross income
BL3 Gross income
BL4 Gross income
BL5 Gross income
BL6 Gross income
BL7 Gross income
BL8 Gross income
* ß1 =
* ß2 =
* ß3 =
* ß4 =
* ß5 =
* ß6 =
* ß7 =
* ß8 =

Basic Indicator Approach
The Bank
(Financial Indicator is a
Proxy for Operational
Risk)
(Scaling
Factor)
Total Capital
Charge
Gross income x α (15%) =
x =
18%
18%
12%
15%
18%
12%
15%
12%
Dissect The Bank
To Better
Understand Its
Operational
Environment

Workshop
Internal
fraud
External
fraud
Employment
Practices &
Workplace
Safety
Clients,
Products &
Business
Practices
Damage to
Physical
Assets
Business
Disruption
and systems
failures
Execution,
Delivery &
Process
Management
Corporate
Finance
Trading &
Sales
Retail
Banking
Commercial
Banking
Payment &
Settlements
Agency
Services
Asset
Management
Retail
Brokerage
Loss Data Loss Data Loss Data Loss Data Loss Data Loss Data Loss Data
Sources
Sources
Sources
Sources
Sources
Sources
Sources
Bus. Line
Bus. Line
Bus. Line
Bus. Line
Bus. Line
Bus. Line
Bus. Line
Bus. Line
 Collect Data at the
Point of Interface
(Prior to Engagement)
so you Know Your
Client)
 And Collect Data
During Engagement
(Loss‐Data)
 Both help the Bank
understand the Client
and the Business
Environment, and
material changes in
circumstances. … All
Necessary to Identify,
Measure and Manage
Risk.

Workshop
Risk Management Is Everybody’s Business
Staff Business Unit Senior
Management
Assessment &
Follow Up
Acceptance or Mitigation
of Identified Risks
Follow Up on Decided
Actions
Oversight &
Control
Reports to Enable Senior
Management Appraisal
Identification
Reporting
Registration of Incidents
and Monitoring of the
Internal Control
Environment
Problems with Risk Culture are frequently found at the root of organizational scandals and
collapses.
Every individual
comes to an
organization with
his/er own
personal
perception of
Risk
It Starts Here
Risks Tracking … Finding The Trail

Workshop
Participative
Risk Management
Full and Consistent
Communication & Coordination
with all Business Units
Autocratic
Risk Management
I Know what to
do, and I will do
it all alone. My
way or the
highway!
Everybody’s Business…

Workshop
Let’s Plant The Seed
of A Better
Understanding
What should The Branch Be Concerned
About . . .

Workshop
Key Issues to Tackle . . .
a) AML & the Risk of Non‐Compliance
b) Branch Personnel Management & HR Risk
c) The Credit Approval Process & The Credit Risk
Environment
d) The Banking Model & How Should The Branch
Maneuver
e) Liquidity, & How can the Branch Help.
f) Between Risk Management & Compliance
g) . . . .

Workshop
AMLCompliance
a)

Workshop
Client is Engaged
Compliance Cycle
Service Cycle
st1Client
Interface
Interface
CIP, KYC
AML Compliance (Regulator Decides)
Client Engagement is Constrained by: The Bank is
Deemed AML‐Compliant, Responsible &
Accountable
Customer Satisfaction (Customer Decides)
Client Engagement is Driven by: The Potential for
Revenue: Interest Income, Commissions & Charges;
and a Word‐of‐Mouth Free Marketing
Both Cycles Are Ongoing
Processes; None is a Destination
by itself
The Most Critical
Customer Interface;
Manage With Care: You
Either Collect all the
needed information (CIP
& KYC), or you have
planted the seeds of
Troubles to Come . . .
Branch
AMLCompliance
End/Start . . .
a)

Workshop
CIP, KYC
Branch
On Going Monitoring &
Compliance
Client is
Engaged
Compliance Cycle
Service Cycle
Interface
End
DD, EDD
On Going Follow up &
Service
 Handling Complaints
 Cross‐Selling
 Updating Customer Profile
(CIP),
 Etc….
Possible RISK: IF “Satisfaction”
Ends Up Competing with
“Compliance”
Customer Risk Scoring
Customer Due Diligence Risk
Automated Transaction Monitoring Systems
Cash Aggregation and Reporting Systems,
Etc…..
AMLCompliance
a)

Workshop
Degree of Engagement in Due Diligence & AML Compliance
Resources Deployed
DD
EDD
RBA
Moving in this direction is a clear indication that there is a desire
on the part of the Bank to continue on serving the client.
Due
Diligence
Enhanced Due
Diligence
Risk‐Based Approach to AML
Compliance
Enhancing Compliance Capabilities … AML Cost
Skills Needs
Know‐How
AML Analytics
The MAIN OBJECTIVE of
Enhanced AML Compliance
Steps is to Improve your
Knowledge of the Client. So the
decision to “Accept & Serve”
the Client will be a Calculated
Risk Choice!
The Use of Technology will be
necessary! Increase reliance on
IT Increases exposure to IT
Failures (i,.e., Risk).
Does the Bank have a good
track record with Managing IT
Issues?
Be Pragmatic & Objective in Compliance . . .
AMLCompliance
a)

Workshop
…and this may
include all types of
Risks a Bank may
Face
AMLCompliance
a)

Workshop
Customer
Satisfaction
Employee
Satisfaction
Subject to Risk &
Compliance
Service
Excellence
Growth
Feedback Process!
A Matter of Service Quality,
Taste & Preferences
A Matter of
Perception!
A Matter of
Commitment!
EmployeesCustomersBank
Supports & Challenges to
Secure the Attainment of
Objectives subject to Risk &
Compliance
Branch Manager Compliance Officer
Provides Advice and
Tools, …
BranchPersonnel&HRRisk
A True Coach Must Be Pragmatic
Employee
At the Point of
Interface with the
Client
Capable & Ethical
b)

Workshop
Staff-Related
Operational Risk
Resignation
Adaptability Qualification
Motivation
Work Force Measure
Recent Joiners
Capture Warning Signals
(As Early As Possible)
Feeds
Continuous Monitoring
Enables
Corrective Action
Increases
People ValueReduces
Key Leavers
b)

Workshop
CALCULATIONof
Bonus for each Branch
ALLOCATIONof Bonus to All
functions in the Branch
PAYMENTof Bonus to
Deserving staff
KPIs
_Reduction in Cost
of Fund
_Volume in Interest-
based Products
_Traffic: More Clients,
More Transactions
_Work Environment in
the Branch
_Identification of Key
Risk Indicators
_Risk Reporting
_Risk Control
_AML Compliance
How Each function
Contributes to bus. Dev.
in the Branch
_Branch Manager
_Deputy BM
_Head of CSR
_CSR
_Teller
_Head of Operation
_Clearing
_Office Boy
_Etc.
Based on each staff’s
Performance Appraisal
Review System
_“A” Performers
_“B” Performers
_“C” Performers
_”D” Etc.
PILLAR 1: Reflects the
Bank’s Strategy, and
Key Performance
Areas
contribution of every
function to the branch’s
Bottom Line
performance of every
staff in the Branch
IncludeRisksinBranch’sTargets&
InvolveEveryone!
b)

Workshop
K.S.A.areattheMercyofAttitude!
Abilities
Knowledge
(Knowledge + Skills)X(Attitude)= Abilities
Formal + Self-Acquired
To Perform & Excel And Grow
Skills
Technical + Soft
Human Capital Accumulation = ∑Abilities
The NOT so visible
Argument that we often
forget
b)

Workshop
ToBeorNotToBe...Loyal?
Skill
Marketability
Loyalty To The
Organization
Loyalty To One’s
Profession
Skill Marketability Reflects
Favorably On The Career And
The Salary Of The Individual
Loyalty To The Organization May Help
The Individual Sustain A Company‐
Specific Employment
Loyalty To One’s Profession
Exerts The Necessary Pressure
On Knowledge And Skill Build‐
Up (Benefiting Both The
Individual & The Organization)
Makes You Punctual
Makes You Knowledgeable
Makes You Employable
b)

Workshop
Acquisition/
Credit
Specific
Customer
Service
Collect And
Review
Data
Credit
Analysis &
Review
Assess
Collateral
And Risk
Document
Approval
&
Pricing
Financial & Risk Analysis: Understanding Risks Processing
Establishing
Contact
Evaluate first
customer info
Customer
Meetings
Debriefing
Request
documents
Obtain data &
information
Completeness/
plausibility
review
Follow up
Review document
Follow up with
Loan Officer /
Account Manager
Standardized
Credit Rating
Document on
other credit
related factors
Inspect
Object
Determine
Loan-to-value
Evaluate
Exposure
Data is
Sufficient
Complete
Loan
Application
Prepare
Credit rate
Handover
Credit File
Follow Up
Data is
Complete
Approval by
Decision
Makers
Check Compliance with
Authority Structure
Prepare Contracts
Get Signatures
Provide Security
Disbursement Review
Disbursement
Monitor &
Report
Resolution
Loan/Asset Life Cycle
Credit Approval Process
Implement
On the
Credit
Decision
Portfolio Analysis
Credit Approval Process . . . Where Are You?
63
Sales: Bank-Client Interface
c)

Workshop
Consequences:
Losses
Risk
Event:
Loan
Default
• Kick off Loan Workout and
Recovery ‐ Beware of
shortcuts.
• Recovery is a Function of the
Quality of the Credit File and
the Legality of Accompanying
Documents
• Losses (Total or Partial)
 Dried up Cash Flow Sources: Client’s business
received a bad hit causing changes in Credit
Risk Circumstances.
 Collaboration between the Bank Employee
and the Client in the provision of inflated
figures (Sales, Revenues, Cash Flows, …)
leading to a false‐favorable credit decision.
 Over‐worked, and Under‐Staffed Business Unit
leading to overlooking some critical changes in
Operational Environment of the Client.
 Incompetent Bank Employee Gave False
Recommendation which led to a False‐
favorable Credit Decision.
 Poor/Inadequate Follow‐up and Reviews
rendering the process weak in capturing
“Warning Signals”
Could there be Violations
to AML Rules?
Causes
…and
Potentially
NON‐Compliant
Exercise: The Root‐Cause of Risks is often at the point of Interface …

Workshop
Pricing Loans . . . !
Quantitative
Evaluation
Qualitative
Evaluation
Internal
Rating
Financial Data Mitigation
Matrix
Probability of
Default - PD
Loss Given
Default - LGD
Exposure At
Default - EAD
Interdependencies: Returns, PD
Risk
Components
Calculation
Of Credit
Risk
Amount
(Measurement
Model of
Credit Risk)
Stress Testing
Expected
Loss (EL)
Unexpected
Loss (UL)
(Single Asset
And
Portfolio)
<< Internal Assessment Systems >>
< Quantification of Credit Risk >
Benefit-Cost
Analysis
Portfolio
Monitoring
Provisioning
Pricing
Profit
Management
Capital
Allocation
< Internal Use >
FIs must focus on Managing
Concentration Risk (or any Risk) in
Real Time:
FIs should ensure that
Concentration Risk is adequately
captured and taken into account
adequately within their ICAAP
and Capital Planning frameworks.
FIs should take time to
comprehend the quantitative,
qualitative and organizational
aspects of Concentration Risk
Management.
FIs should have appropriate
liquidity and capital buffers in
relation to the unmitigated part
of any concentration risk.
c)

Workshop
MAXIMIZE PROFIT subject to:
RISK , REGULATORY, Compliance,
Reporting, Etc. Constraints
RISK .  . .
 Default
 Liquidity
 Maturity
 Others . . .
REGULATORY . . .
 Basel I
 Basel II
 Basel III
 Basel IV (In the making)
 Sanctions Rules
 USA_FATCA, OECD_CRS Requirements
 AML, Etc. . . .
Uses of Funds Sources of Funds
 Reserves
 Loans
 Securities
 Other
Investments
 .  .  .
 All Types of
Deposits
 Borrowings
 Other
Sources
 Equity
 .  .  .
Off-Balance Sheet
Legal Issues .  . .
Banking Model . . . Where Can You Help?
The Branch Manager must
take these constraints into
consideration before they
start assigning targets to
Branch Employees
54
52
c)

Workshop
You can Increase Traffic:
• More Clients
• More Transactions which can be achieved Through cross‐selling
Follow up Diligently on the settlements of Loans
Reduce Loss‐Events.
Promote the Bank through your Social Networks.
You can Increase Traffic:
• More Clients
• More Transactions which can be achieved Through cross‐selling
Follow up Diligently on the settlements of Loans
Reduce Loss‐Events.
Promote the Bank through your Social Networks.
IF …
With every $, LBP in
Business a Typical Bank
Solicits, it MUST Comply
with a Number of
Regulations,
THEN ….
Who can best help the Bank recover some
of the cost of Compliance?
Yes, YOU – Branches.
CHANGE THE RULES OF ENGAGEMENT WITH THE CLIENTS! …
yes you can…. HOW?
Exercise: How To Overcome The Burden Of Compliance?

Workshop
Exercise: How To Overcome The Burden Of Compliance?
Double Transactions
from Existing
Clients…
Double Transactions
by doubling number
of Clients…
?

Workshop
Module 3
Consumer Banking…

Workshop
Commercial
Clients Site
Visits
Personnel
Management
Conflict
Management
Customer
Retention
Handling
Complaints
Dormant
Accounts
Cross-Selling
New Clients
Overdue
Bills
Commissions
& Charges
Manage
Deposit
Outflow
KYC
Updates
Car
Loans
Personal
Loans
Credit
Cards
Debit
Cards
Corporate
Loans
Deposits
SME
Loans
Regulatory
Compliance
Exercise:BranchPerformanceTargets

Workshop
Exercise:ConstrainedOptimization!
With these ever increasing
regulations, how would you
change Your Branch targets to
cope with this changing
environment?
Drop…Add…Emphasize?
?
?
?
1. Deposits
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
9. Manage Deposit Outflow
10. Cross‐Selling
11. New Clients
12. Commissions & Charges
13. Number of Complaints (Customer Retention)
14. Dormant Accounts
15. KYC Updates & Compliance
16. Commercial Clients Site Visits
17. Personnel Management

Workshop
The Illusion of Liquidity
Why Banks Often Face Significant Liquidity Problems?!
• Maturity Mismatch between Assets & Liabilities.
• High proportion of liabilities (especially demand deposits and
money market borrowings) are subject to immediate repayment
where most Assets are the exact opposite!
• Assets & Liabilities Sensitivity to changes in interest rates:
▫ May affect customer demand for deposits.
▫ May affect customer demand for loans.
Central Role in the payment process, reputation and public
confidence in the system
e)

Workshop
The Demand for & Supply of Liquidity
Demands for Liquidity
 Deposit Withdrawals
 Credit Requests From Good Credit
Risk Customers
 Repayments of Debt Obligations
 Tax Liabilities/Payments
 Payment of Stockholder Dividends
 Others (provisions for …)
Supplies of Liquid Funds
 Incoming Customer Deposits
 Revenues from the sale of
Services
 Customer Loan Repayments
 Sales of Bank Assets
 Borrowings From The Money
Market.
 Others (Debt Recovery,…)
e)

Workshop
• These various sources of liquidity demand and supply come
together to determine each Bank’s net liquidity position at any
moment in time
• That net liquidity position (L) at time t is
• Liquidity Deficit is Lt < 0 and Liquidity Surplus is Lt > 0
e)

Workshop
The Essence of liquidity management problems for a Bank.
1. Rarely are demands for liquidity equal to the supply of liquidity
at any particular moment in time
▫ The financial firm must continually deal with either a liquidity
deficit or a liquidity surplus.
2. There is a trade‐off between liquidity and profitability
▫ The more resources are tied up in readiness to meet demands
for liquidity, the lower is that financial firm’s expected
profitability (other factors held constant)
e)

Workshop
AssociationofBanksinLebanon1. Deposits
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
10. Cross‐Selling
11. New Clients
13. Number of Complaints
15. KYC Updates
Exercise:
1. Which Ones of These Targets are Liquidity
Friendly?
2. Which Ones of These Targets are Profitability
Friendly?
3. Which Ones are Both (If Possible)?

Workshop
AssociationofBanksinLebanon 1. Deposits
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
10. Cross‐Selling
11. New Clients
15. KYC Updates
1. Deposits
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
10. Cross‐Selling
11. New Clients
1. Deposits
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
10. Cross‐Selling
11. New Clients
15. KYC Updates

Workshop
Commercial
Clients Site
Visits
Personnel
Management
Number of
Complaints
Dormant
Accounts
KYC
Updates
Regulatory
Compliance
1. Deposits
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
9. Cross‐Selling
10. New Clients

Workshop
Risk Management vs. Compliance
One Illustration: The 3rd Leg Of The Basel Accord
Disclosure & Reporting Under IFRS 9
f)

Workshop
IAS 39 – Incurred
Loss Model
General Provision / Collective Provisions Specific Provision
Non‐PerformingPerforming Watch‐List
Stage 1
Performing
Assets
Stage 2
Under‐Performing
Assets
Stage 3
Non‐Performing
Assets
EL=PD12‐Month x (∑PV
of Cash Shortfalls)
EL=PDLifetime x (∑PV
of Cash Shortfalls)
EL=PDLifetime x (∑PV
of Cash Shortfalls)
What is; and What Should Be…
Moral Hazard
Adverse
Selection
IFRS 9: Forward-
Looking Expected
Credit Loss Model
1st
Recognition
f)

Workshop
Stage 1
Performing
Assets
Stage 2
Under‐
Performing
Assets
Stage 3
Non‐Performing
Assets
ECL=PD12‐Month x (∑PV of
Cash Shortfalls)
ECL=PDLifetime x (∑PV of
Cash Shortfalls)
ECL=PDLifetime x (∑PV of
Cash Shortfalls)
3‐Stage Expected Credit Loss (ECL) Model Using:
1. Probability Weighted Outcome where ECL reflect ‘Best’
and ‘Worst’ case scenarios.
2. Time Value of money where estimates of ECL should be
discounted to the reporting date.
3. Information set must be forward looking.
The Right (…) Information
is YOUR POWER!
f)

Workshop
Expected Credit Loss
• A major change is replacing “incurred” credit loss with
“expected” credit loss.
• This is applied on financial assets that are not measured at
FVTPL including loans, financial guarantees, trade receivables,
lease, etc. but not on equity instruments
• Loss allowance is measured for expected loss for next 12
months or for lifetime of the assets depending on whether
there has been a significant increase of credit risk since first
recognition.
• Simplified approach for trade receivable, contract assets, and
lease receivables.
f)

Workshop
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
10. Cross‐Selling
11. New Clients
1. _____________
2. _____________
3. _____________
4. _____________
5. _____________
6. _____________
7. _____________
8. _____________
9. _____________
10. _____________
11. _____________
12. _____________
13. _____________
14. _____________
15. _____________
16. _____________
17. _____________
‘Profit-Based’‘Risk-Based’‘IFRS 9’
1. _____________
2. _____________
3. _____________
4. _____________
5. _____________
6. _____________
7. _____________
8. _____________
9. _____________
10. _____________
11. _____________
12. _____________
13. _____________
14. _____________
15. _____________
16. _____________
17. _____________
1. _____________
2. _____________
3. _____________
4. _____________
5. _____________
6. _____________
7. _____________
8. _____________
9. _____________
10. _____________
11. _____________
12. _____________
13. _____________
14. _____________
15. _____________
16. _____________
17. _____________
Exercise:PerformwithaPurpose…

Workshop
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
10. Cross‐Selling
11. New Clients
‘Profit-Based’‘Risk-Based’‘IFRS 9’
Risky
Assets
Capital
Provision
Profitability
Commission &
Charges
Capital
Provision
Profitability
?
?
?

Workshop
Risk Management and Compliance MUST NOT Be Competing Tasks Inside the
Hallowed Halls of Banking Institutions
RiskManagement is a Decision & a Choice.
Compliance
Understand The Rules, and Comply with them!
Compliance is a Task intended for Risk Control
You are suited to follow a well
defined track!
You are geared
up and equipped
to travel through
unchartered
territories and
be creative in
avoiding danger
(not Risk)
26
f)

Workshop
1. Deposits
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
10. Cross‐Selling
11. New Clients
 Which one of these targets hold strong if
competition over Clients Deposits is
fierce and Your Branch Performance is
Assessed Based on Profitability?
 Where would you
deploy most of your
Branch Capacity?
The Idea from these exercises has been: IF
you don’t understand your Business
Environment, your Constraints, and your
Capacity, DO NOT bother Setting Targets …

Workshop
18. Client Retention
19. Zero Customer Complaints on rendered Services
20. Identification of Key Risk Indicators
21. Risk Reporting
22. Innovation & Creativity
23. Evidence of Social Responsibilities
24. Knowledge Sharing
25. Conflict Resolution
26. Handling Complaints
27. Evidence of Cross‐Selling
28. Etc…
Exercise:ShapeYourPerformancewith
SmartObjectives…
1. Deposits
2. Car Loans
3. Personal Loans
4. SME Loans
5. Corporate Loans
6. Overdue Bills
7. Credit Cards
8. Debit Cards
10. Cross‐Selling
11. New Clients
Expand Your List of Things to Pay Attention To

Workshop
Part IV:
Special Topics
In ConsumerBanking

Workshop
Special Topics in Consumer Banking
Customer Complaints & The Angry Client.
Complaints versus Objections
Service Quality is “Perception Dependent”!
Understanding Customer Behavior
The Digital Channels & Cybercrime.
Shape Your Risk Culture!

Workshop
Customer Complaints &
The Angry Client

Workshop
ThereisLittlePointin
SeekingNewBusinessWhen
YourExistingClients
ContinueLeaving..
EveryUnhappyCustomer
WillTellanAverageof7
PeopleAbouttheUnhappy
Experience.

Workshop
 First and Foremost … Have the right Attitude & Do not get
defensive or make excuses
 Remain Calm and give a simple apology for the inconvenience
 Keep a well modulated tone of voice. Do not talk down to a
customer or suggest they are at fault
 Maintain a positive and polite attitude, thank the customer for
bringing the matter to your attention
 Ask for permission to ask some questions and explain the
reasons for asking them
 Avoid saying “No” , or “I can not help You” …etc. ; always use
positive phrasing such as “Well, let me see what we can do to
…”
 When customers use abusive language, stay calm, look at the
statement after taking out any foul words …
 Offer a suitable alternative solution .
TheAngryCustomer

Workshop
 Customer Complaints are a GIFT … they tell you what clients think
and feel. Only 4% of customers complain … the other 96% just go
somewhere else
 Let customers “vent-off”. Research shows that this is an effective
start
 Pay attention and probe the customer to improve the quality of
information (remember angry or upset customers usually are
unable to provide High Quality Information)
 Ask the customer how the situation can be resolved. If you manage
the customer to avoid unrealistic demands, the client will most
likely ask for less than what you may volunteer yourself
 Keep In Mind That: Customers whose problems have been
successfully resolved tend to be more loyal than those that never
experienced a problem
 64% of Bank complaints relate to account behavior, and Fees!
CustomerComplaints

Workshop
Exercise:ShapeYourPerformancewith
SmartObjectives…
Identify ONE of the Services/Products your
Branch handles.
List what Error, COMPLAINTS, … that served
as customer “dis‐satisfiers”.
Suggest some specific and realistic
improvement plans that your branch can
commit to achieving without the need for
upper management.
Identify ONE of the Services/Products your
Branch failed to handle.
List what OBJECTIONS have been voiced by
the clients and constrained the sale of this
Service/Product.
Suggest some specific and realistic
improvement plans that your branch can
commit to achieving without the need for
upper management.

Workshop
Service Quality Is
“Perception Dependent”!

Workshop
 One second of unsafe drinking
water every 16 years
 One unsafe landings in 10 years at
all US Airports
 3 babies dropped at birth by
doctors every 100 years
 One incorrect operation every 20
years
 35 lost pieces of mail every year
 One incorrect drug prescription
every 25 years
 42 checks deducted from the
wrong bank account every year.
 One hour of unsafe drinking water
every month
 Two unsafe landings every day at
Chicago O’Hare Airport
 50 babies dropped at birth by
doctors every day
 500 incorrect operations every
week
 16,000 lost pieces of mail every
hour
 20,000 incorrect drug prescriptions
every year
 22,000 checks deducted from the
wrong bank account every hour
You
See
The
Client
Sees
You
See
The
Client
Sees
How About 99.73% Accuracy? How About 99.9966% Accuracy

Workshop
 Reduce Total Defects / Errors in the entire
process
- Reduce cycle time
- Reduce re-work
- Improve efficiency
 Best in Class companies have proven that
the Highest Quality Producer IS the
Lowest Cost Producer .

Workshop
Understanding Customer
Behavior
The financial crisis has caused customers to change their attitudes
towards their banks. Customers are looking to move provider or
diversify their banking portfolio, spreading financial products across a
number of different institutions to minimize their exposure to
perceived risks…

Workshop
• Reasons Customers Look
Elsewhere
• Survey Says: 24% of
respondents have changed
their main banking provider
at some point in their life,
but 10% did it in the last
two years.
• Price (43%), Service (42%)
and Product (31%) are the
top three concerns driving
customers to change their
banks.
What Shapes Customer Behavior?
The Impact on Trust
• Today’s economic recession has had a negative impact on
the trust that 45% of Clients have in their banking
providers.
Loyalty
• Among customers who have more than one bank, 74%
have only one product/service with each of their non‐
main banks, using them as specific banks for specific
products.
Measuring Satisfaction
• Service Quality is the most important criteria for
customers when choosing a bank.
• Nearly a third of customers consider a personal
relationship with their bank advisor to be highly
important when choosing a bank.

Workshop
Restoring Trust
• It is time for a “back to basics” approach to Consumer
Banking, with simple products clearly explained to
customers.
• Banks should increase clarity and transparency
around complex products.
• Sales staff should be upfront about what a product
does not offer, as well as what it does.
• Banks should innovate around the customer
experience.
• The opportunity to maximize business within the
current customer base by developing existing
relationships should be core to the cross‐selling
strategy.
• Customers are demanding better
personal relationships with advisors.
• Banks should invest in
communication between
departments, so as to improve the
customer experience when an
individual interacts with more than
one department.

Workshop
Addressing Loyalty
• Banks need to develop new strategies to target
dissatisfied customers and prevent attrition.
• Improving customer service and service quality will
have a major impact on Loyalty.
• Staff‐Incentive programs should be considered to
reward superior service quality.
• Advanced understanding of the bank’s customer base is
vital.
• Banks must conduct analysis to identify and target
resources towards key customers.
• To prevent customer attrition,
banks should consider developing
“product bundles” for customers.
So that there are tangible benefits
in purchasing a number of
products from one provider as
opposed to patronizing several
banks.
• Banks must invest in, and expand
customer retention units to take a
more holistic view of customer
concerns across product areas.

Workshop
Increasing Satisfaction
• Banks should identify opportunities to cut costs and ensure customers receive the
service through their preferred channel.
• There are opportunities for increasing profits by maximizing cross‐selling
opportunities.
• Customers are demanding improved access to Personal Advisors. This does not
mean banks must invest in more branches, but instead they should improve access
and communications using remote channels, and increase customer awareness of
such offerings.
• Banks must think of the services they promised to customers versus what they
actually deliver, and address deficiencies.
Have You Ever Asked Your Client IF He/She Would Recommend Your Bank To His/Her
Friends?

Workshop
Preventing Attrition
• Banks must address service levels and pricing for
key customers using sophisticated customer
segmentation.
• Banks need to personalize and transform the
customer relationship as customer satisfaction is not
reliant on price.
• A Personalized Relationship Program (PRP) is a true
differentiator which cannot be easily copied by the
competition.
• There is a need to better harness customers during
their first few months with the Bank.
• Customer analysis must be improved
to allow banks to understand which
customers are leaving and why, and
to then take a view on the best way in
which to address attrition.
• Incentivizing the sales force should be
used not only to encourage the selling
of new products, but also to reward
renewals and retention of key
customers.

Workshop
Module 4
Consumer Banking…

Workshop
Digital Channels

Workshop
And many more . . .
Did You Live The Experience? … Dream vs. Reality?!
Didn’t you dream of having Super Power? Haven’t You Wished You Can Fly?Avatar…!
PG 13 PG 13PG 13
PG 13 PG 13
Motion‐Picture rating of PG 13
advising parents that some
material in the film may be
unsuitable for children under 13.

Workshop
And many more . . .
This Is Where Dreams Are Made!

Workshop
Is He For Real?!
The Good Old Days …

Workshop
We copied ‘Disney’s Mentality’ to ‘Banking’; and here is what
we have . . .
Super Power
Real

Workshop
The Consumer Banking
Environment
Evolved NOT BY CHOICE

Workshop
In an Effort to cope with the invasion of Technology & Innovations . . .
Different Banks Have Been Trying With
Different Version of The Branch Of The
Future . . .

Workshop
Arguments
In Favor & Against The
Widespread of Digital
Banking

Workshop
InSportsInSports
InstantReplay

Workshop
Legacy branches are typically too large, lacking technology and are
generally irrelevant in today’s dynamic market.

Workshop
Most consumers
rely on brick &
mortar for
commerce and
will continue to
do so …
Just because a
consumer might need
to talk to a person, it
doesn’t mean they
have to be in the
same physical space
to do so ...
Nearly 60% of
traditional banking
products still being sold
in the branch …
Most banks don’t
offer a decent digital
customer acquisition
mechanism ...
Most retail
deposits still
take place at
the branch …

Workshop
Fairly complex lending
products like
mortgages are being
done online with more
frequency.
Rural markets will still
have access to full-service
sites.
Consumers are
migrating to digital
channels for more than
just simple transactions.
In ten years, there will
be far fewer physical
branches
The need to visit a
physical branch will only
occur for the most
complex sales and
service issues.
Branch networks will
be consolidated with
little need for
transaction centers.
Innovation is
forcing branch
models to evolve
with the market.

Workshop
Branch footprints will shrink based
on:
Purpose,
Market, and
Business case.
Designs will reflect the audiences
they serve.

Workshop
• For branches going forward, engagement will be key. This
includes:
 Product sales,
 Problem resolution and
 Sound advice.
• Staff competency and training will be top notch:
 Fewer employees will be entry level
 More will have a breadth of skills and knowledge base that
they bring to bear on their customer’s issues.
• Given the variety of technological channels through which
customers can interact with the institution, the customers who
actually visit the branch evidence a need that they believe can be
best fulfilled by someone at the branch. This expectation must be
met with competency.

Workshop
Inviting & Raising
The Probability of
Cybercrime

Workshop
It’s More about the People
Behind the Technology than
Technology itself!
• Between “Innocence”
AND “Criminal”
Intentions
• Behind every Risk
Event!

Workshop
In 2015, 38% more security incidents were detected
than in 2014.
Theft of “hard” intellectual property increased 56%
in 2015.
Staff remain the most cited source of compromise
(Risks).
Risk Events attributed to business partners climbed
22%.
Source: Global State of Information Security Survey, March 2016

Workshop
Suppliers /
Partners
35%
34%
30%
29%
18%
22%
15%
19%
13%
16%
2015
2014Current
Employees
Former
Employees
Current Service
Providers/Consultants
/Contractors
Former Service
Providers/Consultants
/Contractors
Sources of Risk Events
Source: Global State of Information Security Survey, March 2016
More About Security Compromised

Workshop
What Drives Individual
Performance
And Shapes Risk Culture?

Workshop
Talent Laundering
• Talent Versus Ethic
• Hard Work
• Abundance of Qualifications overshadow the
need to probe about Ethics.
• Individuals with Bad Ethics seek Employment
only to feed their criminal intentions.
• Talents tainted with Bad Ethics is only after
short term gains.
• Those who are loyal to their profession hold
the highest degrees of Professional &
Personal Ethics.

Workshop
Have I succeeded in Reshaping
Your ‘Risk Culture’?
• Let’s see how much attention have
you been paying!

Workshop
The United States is dealing with a nasty bird flu
outbreak.
Sixteen states have reported cases of highly
pathogenic H5 ‘Avian Flu’ among flocks of birds like
turkeys and chickens as well as wild birds.
Travel Back in Time to: May 13th, 2015
PayAttentionToDetails

Workshop

Workshop
It’s May 2015, and you’re on
a Visit to the USA. You were
asked by a Dear Friend,
who’s a Zoo Keeper, to pick
One animal to take care of
alone for a day and inside a
25m2 room…
YOU CAN’T DECLINE!
Feel free:
 To ask any question. I’m
the Animal Keeper!
 To do what you deem
necessary to succeed.
You’re THE ZOO KEEPER

Workshop
1
3
2
4

Workshop
Part V:
Closing Thoughts

Workshop
Brilliant
Surgery!
Well Done!
Shame the
patient died.
DoOutcomesMatterinDecision
Making?

Workshop
K.I.S.S. …Keep It Simple Sir !

Workshop
AssociationofBanksinLebanonThankYou

At.risk.in.consumer banking

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