At risk in retail banking

Mohammad Fheili – fheilim@jtbbank.com
What’s @
Risk in
Retail
Banking
What’s @
Risk in
Retail
Banking

Mohammad Fheili
“Over 30 years of Experience in Banking.
mifheili@gmail.com (961) 3 337175
 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:
• An Economist at ABL,
• Senior Manager at BankMed
• Senior Manager & Chief Risk Officer at Group
Fransabank
 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.”

The Truth
About Retail Banking
• The Customer is at the
Heart of Retail Banking
• Knowing the Customer and
Driving Profitability Through
This knowledge is the
Lifeblood of Retail Banking.

However,
• Increased Competition
• Advent of Technology
• Proliferation of Channels to service the Customer
have led to:
• Increased Usage of Impersonal Electronic Services: Low Cost Electronic Services;
Widespread and Diffused Customer Base. This, in turn led to:
 Lower Customer Intimacy (How much intimacy can one get out of e‐Banking!).
 Reduced Switching Costs Between Different Banks (Customers these days are constantly
shopping for the better deal).
 Increased Chances of Fraud and Credit Risk (Law 318 on Fraud & BDL Basic Circulars 83 –
Regulator’s Version of Law 318, and BDL Intermediate Circular 371 – Compliance Officer at POS, and 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)
• Less Time to Know and Influence Customers.
 Research shows that Customer Interest peaks and falls rapidly especially in
response to a Promotional Event.
 This makes it absolutely necessary for banks to optimally leverage all available
customer touch points so as to be able to influence the customer (e.g., You find ads and
offers on ATM receipts).
TheTruthAboutRetail Banking

Information Technology.
Price/Value Propositions.
Customer Expectations.
Digital Competitors.
What Has Changed?
Retail Banking Organization
Needs To Adapt.
Changes

Changes & Coping . . .

Information Technology at the forefront of Operational Risk:
But ….!
 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 which
spillover on Branch Performance: Staff Skills, Workflows, Policies & Procedures, and a
host of other changes.
 In today’s technologically intense production
processes, information technology (IT) risks cannot be
considered independently of other types of risks since
it reflects on our ability to serve and satisfy our clients.
 Recognizing these challenges and acknowledging that
the Branch has a role to play in managing this risk will
put management one step ahead. Because processes are
Technology dependent, data collection has changed from being mostly qualitative to
overwhelmingly quantitative; Types/Nature of Mistakes committed by Branch
Employees are Different; etc.
Head of Retail Banking
is a Member of the IT
Steering Committee,…
Or Not!
Information Technology

SIMPLE! Bricks & Mortals
People
Come
First
Data
Come First
The Risk of Not taking
account of that in the
Transformation Process.
 Interfacing with
Clients
 Delivery Channels
 Product Features
 Customer Needs &
Wants
 Service Proliferation
 Staff Skill Level
Requirements
 Agility
 Etc…

Changing Customer Expectations and the Power to
Punish:Power has shifted to the customer as they become more connected, more demanding and less
loyal.
 Instilling the vision and values needed to rebuild trust.
 Harnessing big data analytics, social media
monitoring and other new forms of insight to
anticipate and respond proactively to changing
customer demands. If you don’t Duly respond, some other Banks will;
and the Cost of ‘Switching’ is negligent.
 How to 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’).
Retail Banking Unit
must Anticipate
and Respond to
Changing
Customer
Demands!
Customer Expectations

Digital Competitors and the Age of Innovation:As the
pace of innovation accelerates, developments that would have taken years to impact on the market can now
become consumer expectations in a matter of days or months.
 New competitors have head start on trust.
 Operational barriers to entry are disappearing as tech‐enabled entrants use digital distribution
and advanced customer profiling to break into the market.
 How to create a Business Model that is Flexible enough to
reinvent itself when better technologies or potential
partners come along.
 How to lead innovation – even fast following could leave your business marginalized.
 How to create an adaptable workforce, unbound by hierarchy, organizational
siloes or restrictive practices.
The Culture
& Practice of
Retail
Banking is
the
Backbone of
Workforce
Agility!
Agility in the Digital Age
It is about the ability to make
choices, decide and act swiftly.

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?
 Is your thinking radical enough? … Your Customer decides; NOT YOU!
 Does your mission embrace the values of the post‐crisis
world?
 Does your organizational capability reflect your customers’ changing
expectations?
 Do your organizational capabilities reflect the new economics
of your business?
 Is your organization ready for change?
Since Branches
are the Life‐
Line of the
Bank, Retail
Banking Unit
ought to be
Responsible
for securing
Branch Staff
Readiness!
Staff Readiness

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

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

Credit Risk
Market Risk
Operational Risk
Reputational Risk
Business Risk
Strategic Risk
. . . Other Risks
Let’s
Explore
Risk
Stay and
Risk
Extinction
Comfort ZoneCoping With
Changes

We’re not advocating
Suicide; You Gear Up and
Jump.
Risk
Compliance
is Straight
Forward
YES
NO

• Most of the Risks Identified
throughout the Branch Network are
Operational Risks.
• Beware to Look In The Right
Direction . . . .
• Operations/Transactions in the Head
Office are Dramatically Different
from Operations in Branches.
• Therefore, the Types and Nature of
Risks Identified in the Head Office
are Significantly different from those
found in the Branches.

Retail Banking Division is/has:
 The Biggest Employer in a Typical
Banking Organization
 The Most Active Processor of
Transactions (i.e., Traffic) in a Typical
Banking Organization
 The Highest Utilization Rate of IT
Systems in a Typical Banking
Organization
 … there is more

Operational Risk& BCBS
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.!

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
Loss Data
Loss Data
Loss Data
Loss Data
Loss Data
Loss Data
Loss Data
Advanced Measurement Approach

Flying From “Beirut” To “Paris” Is a ‘Service’; Just Like Opening a Saving/Checking Account.
Descent Below Safe Altitude is an Incident (With Zero Losses this time). …. BUT . . .
Minimum Safe Altitude (MSA)
IncidentAccident
Operational RiskLoss Events
YOU MUST Report ALL Incidents
irrespective of Current Consequences/Impact

Operational RiskDecision vs. Outcomes
Brilliant
Surgery!
Well Done!
Shame the
patient died.
Do Outcomes Matter?

Acquisition/
Credit
Specific
Customer
Service
Collect And
Review
Data
Credit
Review
Assess
Collateral
And Risk
Document
Approval
&
Pricing
Sales: Bank-Client Interface 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
Real-Time Management of Loan
Portfolio begins here by building
knowledge about Clients.
Credit Risk
Branch
Branch

Consequences:
Losses
Causes:
Risk
Event:
Loan
Default
• Loan Workout and Recovery
• Recovery is a Function of the
Quality of the Credit File and the
Legality of Accompanying
Documents
• Losses (Total or Partial) of
Principal and Interests
 Dried up Cash Flow Sources: Client’s
business received a bad hit.
 Collaboration between the Branch 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 Branches
leading to overlooking some critical changes
in business circumstances of the Client.
 Incompetent Branch Manager Gave False
Recommendation which led to a False‐
favorable Credit Decision.
 Poor/Inadequate Follow‐up at the Branch,
absence of Loan monitoring and Reviews
rendering the process weak in capturing
“Warning Signals”
 Etc.
How Implicated is
Branch Management in
Credit Risk?
Now, Do You Think
Branch Management
ought to be
involved?
Credit Risk

Banking Model & Risk
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 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
With every Dollar
in Service a
Typical Bank
Solicits, it MUST
satisfy all these
Regulatory
Constraints first!
VERY COSTLY!
Legal Issues .  . .
Who can best help the Bank
recover some of the cost of
Compliance?
Yes, YOU – Branches.
 You can Increase Traffic:
• More Clients
• More Transactions
which can be
achieved Through
cross‐selling
 Follow up Diligently on
the settlements of Loans
(and ‘Bien Trouvé’,
Updated Financials, Site
Visits, etc….)
 Reduce Loss‐Events.
 Promote the Bank
through your Social
Networks.

Non‐Compliance By
Mistake… Due to lack of
understanding …
Simply Comply
Comply By Fear
AML [Operational] Risk

Client is Engaged
Compliance Cycle
Service Cycle
st1Client
Interface
Interface
End
CIP, KYC
AML Compliance (Regulator Decides)
Client Engagement is Constrained by: The Bank is
Deemed AML‐Compliance 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

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”
End
Customer Risk Scoring
Customer Due Diligence Risk
Automated Transaction Monitoring Systems
Cash Aggregation and Reporting Systems,
Etc…..

Employee
Is Responsible For
Development and career
Supervising Officer
Supports and Challenges
To Secure the Attainment
of Organizational
Objectives
HR Specialist
Provides Advice, Processes,
Tools, Products
Staff
Satisfaction
Customer
Satisfaction
Business
Performance
Service
Excellence
Growth
Feedback Process!
A Matter of
Perception!
A Matter of Taste &
Preferences!
A Matter of
Commitment!
Risk‐Based Performance
How Is
That
Related To
Risk?

CALCULATIONof
Bonus for each Branch
ALLOCATIONof Bonus to All
functions in the Branch
PAYMENTof Bonus to
Deserving staff
Key Performance Areas
_Reduction in Cost
of Fund
_Volume in Interest-
based Products
_Traffic: More Clients,
More Transactions
_Work Environment in
the Branch
_Identification od Key
Risk Indicators
_Risk Reporting
_Effective Risk Control
_AML Compliance
Based on each function’s
Contribution to business
Development in the
Branch
_Branch Manager
_Deputy BM
_Head of Commercial Unit
_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” and “E” do not
receive any bonus
irrespective of how the
branch performs
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
30

Employees
Equitable
Sustainable
Bearable
Customers Viable
Bank

In Desperate Search for Data to
Identify, and Assess Risks
(Intentional & Unintentional)
which May Be Encountered By
Employees of the Various Business
Units including Branches and . . .
Non‐Identifiable Risk
Non‐Identifiable Risk
Financial Institution’s Risk Population
What is Normally Used in
Risk Identification:
• CIP
• KYC
• DD
• EDD
• Complete Credit File,
EAD, LGD, PD, UL, EL,
etc. and Proper
Follow Up
• Comprehensive &
Consistent Data about
the Market
• Etc.
Identified &
Identifiable
Risks
Importance of Data
Involve ALL Staff

Collect
them
all!
Data
Data
Data
Data
Data
Data
Data
Data
Data
A Data warehouse is a good
idea, but a warehouse only
works when Staff bother to
make deliveries into it –
and 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, Risk Decisions are
Ambiguous, Ignorant, or
Uncertain!
Any Piece of Information
Will Have Implications On
Success.
Importance of Data
All Data is IMPORTANT

Risk ManagementIs Everybody’s Business
Staff
Branch Staff
Business Unit
Branch Mgmt
Senior Mgmt
Branch Network Division
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
Importance of Data
Everybody’s Business

Increasing Our Understanding of
Potential Outcomes
Increasing Evidence on Probability of
occurrence
RiskManagement Ambiguity
Uncertainty
Data‐Rich, Information‐Driven
Decision‐Making Process:
 KYC, CIP, DD, EDD, RBA, Etc..
 EL, UL, PD, EAD, LGD, Etc…
 DEaR, VaR, Etc…
Ignorance
A Bank is expected to
collect ALL needed
data to move closer to
Risk Management and
Away from:
 Ambiguity,
 Ignorance, and
 Uncertainty.
Importance of Data
Perception Vs. Reality!

Importance of Data
All Data is Relevant

1 2
34
Your Assignment is to Pick
One Animal to take care of,
• for One day,
• Inside a 25m2 room; and
• Alone?
You May Ask Any Question
To Help You Prepare
Adequately For This
Assignment.
Importance of Data

At risk in retail banking

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