Professional Documents
Culture Documents
CBN Finance Markets
CBN Finance Markets
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Risk management is a comprehensive process adopted by an organization
that seeks to minimize the adverse effects it is exposed to due to various
factors -- economic, political or environmental, some of them inherent to the
business, others unforeseen and unexpected.
The greater the RISK associated with an activity the greater potential to
generate a high return.
Financial institutions do take RISKS – The biggest RISK is Not Taking A
RISK.
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Definition of Risk Management
This presentation will cover the main identified risks in Financial institutions
and determine how well risks are being managed.
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Identifying Risks
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Bank lending/Investment involves three parties :
o The suppliers of funds (The depositor)
o The users of funds (The borrowers)
o A financial intermediary (Bank)s
There are usually five major organization groups that participate in risk
management process. These groups are responsible for defining
implementation ,and/or reviewing risk management policies, rules and
procedures within the bank.
Taking risks can almost be said to be the business of bank management. A bank
that is run on the principle of avoiding all risks or as many of them as possible, will
be a stagnant institution ,and will not adequately serve the legitimate credit needs
of its society. On the other hand a bank that takes excessive risks or credit is
more likely, takes them without recognizing their extent or their existence will
surely run into difficulty.
All business involves some type of risk and banking is no exception.
Credit risk is major category of risk of the bank. It occurs whenever there is a
possibility that is the customer cannot meet contractual obligations to the bank
in term of :
INCREASE VALUE BY
Providing
Appropriate Increasing
Level Improving
Return on
and Consistency
Capital
Allocation of Earnings
of Capital
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The best way to reach this objective is to understand
the full risk environment within which you operate...
External Internal
Environment Environment
Asset Risk
Culture
Social/Legal
Trends
Liability Risk
Distribution
Business Risk
People
Competition
Event Risk
Processes
Political/
Regulatory Operational Risk
Climate Technology
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…and the complete set of strategies that are available to
you...
Financial Operational
Strategies Strategies
Hiring/Training
Financial Risk Capital
Structure
Incentive Programs
Asset Risk
Asset
Allocation Internal Controls
Liability Risk
Products
Pricing
Technology
Business Risk
Product Mix Customer Service
Event Risk
Market Strategy
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…and to apply this knowledge
in a holistic risk management framework, to drive value
Increase Value
Return
Consisten
Capital
cy
Understand Internal
Holistically Optimise Financial
and Manage and Operational
External Environment Strategies
Financial and
Operational
Risks
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To accomplish all this in a consistent manner, it is necessary to
implement a continual management process
Develop
Best Implement
Strategie Strategies
s
Monitor
Performance and
Environment
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In summary, Enterprise Risk Management:
Allows you to determine the necessary capital level, deploy unneeded capital
and improve return on capital
Provides
ProvidesCompetitive
CompetitiveAdvantage
Advantage
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RISKS
MUST BE:
KNOWN
UNDERSTOOD
QUANTIFIABLE
CONTROLLABLE / ACCEPTABLE / BANKABLE
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RISKS FACED BY Financial institutions
CREDIT RISK
MARKET RISK
INTEREST RISK
LIQUIDITY RISK
OPERATIONAL RISK
COUNTRY RISK
OWNERSIP / MANAGEMENT RISK
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THE RISK THAT THE OBLIGOR (BORROWER) WILL NOT BE ABLE TO
REPAY THE DEBT (LOAN) UNDER THE TERMS OF THE ORIGINAL
AGREEMENT (LOAN AGREEMENT).
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CHANGES IN MARKET RATES AND PRICES WILL IMPAIR AN
OBLIGOR’S ABILITY TO PERFORM UNDER THE CONTRACT
NEGOTIATED BETWEEN THE PARTIES.
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INTEREST RATE RISK IS THE EXPOSURE OF AN INSTITUTION'S
FINANCIAL CONDITION TO ADVERSE MOVEMENTS IN INTEREST RATES,
WHETHER DOMESTIC OR WORLD-WIDE.
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THE RISK THAT A BANK WILL BE UNABLE TO ACCOMMODATE
DECREASES IN LIABILITIES OR TO FUND INCREASES IN ASSETS. SUCH
RISKS ARISE WHEN THE REPRICING OR MATURITIES OF ASSETS DO
NOT MATCH THOSE OF LIABILITIES.
• CRITICAL RISK
• MATURITY MISMATCHES
• BASED ON MARKET CONDITIONS & PERCEPTIONS
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OPERATIONAL RISK
THIS RISK ARISES FROM THE LACK OF EFFECTIVE INTERNAL CONTROLS AND AUDITING
PROCEDURES. PARTICULARLY IMPORTANT IS THAT THE BANK SHOULD HAVE GOOD
INTERNAL CONTROLS
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RISK ASSOCIATED WITH THE ECONOMIC, SOCIAL AND POLITICAL
ENVIRONMENT OF THE BORROWER’S COUNTRY. COUNTRY RISK IS
MOST APPARENT WHEN LENDING TO FOREIGN GOVERNMENTS/ THEIR
AGENCIES AND OTHER CUSTOMERS.
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THE RISK THAT OWNERS / SHAREHOLDERS, DIRECTORS OR SENIOR
MANAGEMENT MIGHT BE UNFIT FOR THEIR RESPECTIVE ROLES OR THEY
ARE ACTUALLY DISHONEST.
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RISK MANAGEMENT
Familiarisation of Management with Risks
Implementation of Internal Controls
Sound Internal Audit System
Efficient MIS in Place
Competent Group of Risk Managers
Prompt Action & Monitoring
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Risk Quantification
Risk quantification techniques becoming important to determine capital
requirements
More reliance on Financial institutions’ own systems for identifying and
managing risk
Not only quantitative; also processes and ‘culture’:
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DEPOSITS IN A BANK REPRESENTS WHAT ?
“Yet bank assets are subject to credit risk, market risk, and settlement risk.
With international lending, there is foreign exchange risk and transfer risk.
Also there is management risk and risk of fraud.”
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GENERAL
Presence.
Evaluation of Risks Requires An Understanding of The Bank, its Customer
Mix, its Assets & Liabilities And The Economic And Competitive
Environment.
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INTERNAL CONTROLS
RISK RATING SYSTEM FOR CREDITS
CLOSE MONITORING OF OPERATIONS
COMPETENT CREDIT MANAGERS
DUAL CONTROLS
SYSTEM TO STUDY THE INDUSTRIAL AND ECONOMIC DEVELOPMENT FOR ESTABLISHING TARGET AREAS
OF INVESTMENT
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Reliance on Internal Control ?
Once the management system is in place, supervisors can determine that the
systems are working properly by testing the systems. If the systems are
inadequate, the scope of the inspection can be expanded so that risks are
properly identified, quantified and corrective action initiated.
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Principles of Control
Segregation of duties
• Dual control
• Adequate Compensation
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INTERNAL AUDIT SYSTEM
INDEPENDENC.
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Objective of Internal Audit
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Procedures for Internal Auditors Work
Organizational Structure of the Audit Department
Independence of the Audit Function
Auditors Qualifications
Audit Staff Qualifications
Content and Utilization of the Audit Frequency and Scope Schedule
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MIS
AN ADEQUATE “MIS” HELPS IN TIMELY IDENTIFICATION OF RISKS
RATING
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Thank you.
Questions
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