India also upbeat on Remittances

Along the same lines as the previous post, Remittances to India have not slowed down significantly according to the Reserve Bank of India (RBI).

Writing in its annual report the RBI said "Available information indicates that inward remittances to India have not been impacted significantly by the economic crisis," also contradicting popular perception of a severe impact on remittances.

According to the World Bank estimates (in July 2009), remittance flows to developing countries, which increased to $ 328 billion in 2008 from $ 285 billion in 2007, are projected to decline by 7.3 per cent in 2009, the RBI said.
Click on the post headline to read the full article.

Remittances continue to grow

The global economic crisis has led to dire predictions of a dramatic fall off in Migrant Workers Remittances. Just how true is this? Looking at the news reports coming in from across the globe it does seem that while there was indeed a fall-off especially at the end of 2008 and early 2009, all signs now seem to point to continuing healthy flows of these funds.

According to the state-run “Land Bank of the Philippines” remittances may grow by as much as 3.1% this year as overseas Filipino workers (OFWs) are expected to send more money to their families this semester as the holiday season nears. Read all the details at http://www.bworldonline.com/BW083109/content.php?id=053

Is cost cutting behind the PayPal & Google Apps outages?

Recent repeated outages at PayPal as well as outages at Google Apps software could, according to some observers, be the result of IT budget and personnel cutbacks. This gives a whole new twist to the affects of the current recession.

See the full Computerworld article at http://www.computerworld.com/s/article/342159/Cutbacks_Could_Be_Causing_IT_Outages

Transport tickets to be replaced by mobile phones and bank cards?

The UK government is proposing the introduction of an England-wide smart ticketing system that will let travelers pay for bus and train journeys using their NFC-enabled bank cards and mobile phones. This plan come in the wake of London's successful Oyster card system, which is now used for 78% of bus and tube journeys.
The idea is a national ticketing infrastructure using the government-backed ITSO smartcard specification which will enable 'tickets' to work anywhere in the country. Travelers could then use mobile phones and bank cards to pay directly for journeys by tapping them against specially equipped readers.

A consultation on the ticketing proposals can be found at: http://www.dft.gov.uk/consultations/open/smartticketing/ or click on the post title.

The proposal explains the concepts of smart and integrated ticketing, summarizes the current smart and integrated ticketing schemes in England, outlines the department’s vision for the future of smart and integrated ticketing and seeks to learn the consultees’ views on the subject and how much involvement they feel the Department should have in implementing such schemes.

Risk Management in a Post-Financial Crisis World

By Stanley Epstein – Principal Associate at Citadel Advantage


One thing that the financial meltdown has show in crystal clear relief is that among the many contributing factors, there can be no doubt that Risk Management didn’t adequately manage risk. Why this was so is going to be the subject of much debate in the coming months and years. Were Risk Managers constrained by the executive suite who wouldn’t hear the warnings, or were Risk Managers not answering or not even able to answer the basic questions of their trade? Whatever the reason the profession of Risk Management has some deep soul-searching to do.

Now, all of a sudden, that the economies of many countries, not to mention the banking industry, is in tatters, we have dozens of articles and blogs all bemoaning the state of risk management and what we need to do to get everything right again; as if there is some elixir, or some magic wand that will put it all right.

All these blogs and articles are pounding away on the same old drum; all are documenting how badly everyone has done in managing risk and all are extolling bank boards, senior management, regulators and rating agencies to do better next time.

Where were all these authors and bloggers in the good times? Where were they in the heady days prior to the summer of 2007 when the banks and the rest of the financial industry was gaily acting if the only way forward was “up”; when the “old” economy had been declared dead as a dodo and the mantra of the “new economy” was “profits”, “bonuses” and “innovation”. Like the “old economy”, “risk” in all its forms had, by the invocation of all the new hedging and derivative strategies been declared dead too.

True there were some (all too few) who sounded dire warnings of where this was going to end – but who wants a Jonah in their midst when there is a never-ending beach party on the go?

As a professional risk management practitioner and trainer I really feel aggrieved with all the soul searching and hand wringing going on at the moment. Tell me please where all these new risk averse converts have come from? Where were they when they were really needed?

Now that the party is finally over it is time to do things properly. Risk management in the first decade of the 21st century failed miserably. The tone at the top was rotten, whether in the banks or the regulatory agencies or the risk raters themselves. And this rot permeated all the way down to the bottom of the pile.

What were the failures?

The failure to measure risk – risk models were misused, misspecified and most of all misunderstood.

The failure in training – bank boards and regulators were not adequately instructed in what “risk” really meant. Bank staff was only trained in the three P’s – Product, Performance and Profit. Issues like risk concentration, scenario planning, operational failures were only concepts that made one sound intelligent. Worst of all – risk management costs money and of course “unjustified costs” are the bane of every diligent (but not prudent) banker.

The failure to mitigate risk – without understanding risk it cannot truly be measured and without measurement it cannot be mitigated. These factors are interconnected. The one leads to the other.

Enough of this hand wringing! We all know where the blame lies. What is needed now is some courageous risk managers who will roll up their sleeves and get the job done – properly this time.

Liquidity and Wholesale Payments

The global financial crisis has yet again focused minds on the need for banks to provide their corporate customers with liquidity and risk management solutions. Additionally, while regulatory measures such as the Single Euro Payments Area (SEPA) and anti-money laundering (AML) legislation require the continuing transformation and investment in wholesale payments, the financial crisis means that heightened cost management is now a critical necessity. The industry has begun to question whether managing these conflicting requirements implies the need for a new approach to wholesale payments technology.

Datamonitor sponsored by ACI Worldwide and IBM, has just published a report that looks at business and technology responses in wholesale payments to the post-financial crisis landscape, and assesses whether a service-oriented architecture (SOA) approach could help to meet these challenges.

Their main findings are;

• Despite the global financial crisis, increasing compliance and customer requirements will continue to drive the need to change wholesale payments.
• Delivering both efficiency and innovation will require the convergence of so-called “siloed” payments operations and processes.
• The underlying IT platforms will need to support process standardization and simplification while achieving efficiency at the same time.
• The SOA approach can enable this change by facilitating extensibility and providing operational leverage while controlling costs.
  

To download the full Datamonitor report go to:
http://www.aciworldwide.com/downloads/PreparingWholesalePaymentsforthePost-FinancialCrisis.pdf

The Nigerian 419 scam

A fascinating insight into the 419 scammers as they ply their trade. This is a picture that one doesn’t normally see. Read it on the Washington Post's website

http://www.washingtonpost.com/wp-dyn/content/article/2009/08/06/AR2009080603764.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter

New South African fraud exposed

A major area of operations risk is in the areas of fraud. From Johannesburg comes the news that South Africa is currently in the midst of what some are describing as a fraud pandemic. At its epicentre is the Companies and Intellectual Property Registration Office (CIPRO). Over the past two years corrupt officials at CIPRO, acting with seeming impunity, have facilitated hundreds if not thousands of scams which have hit the South African Revenue Service (SARS), a number of prominent companies, and hundreds of smaller private businesses. Just two weeks it was reported how in 2008 duplicates of Sun Microsystems South Africa Pty Ltd and SBC International Management Services were fraudulently registered as companies on CIPRO. Bank accounts were set up in these counterfeit companies' names. R51million (USD 6.4 million) in tax refunds from SARS, due to the legitimate companies, were then diverted into the counterfeit's accounts.

An investigation has revealed that this CIPRO based scam was just the tip the iceberg. Counterfeit companies are being fraudulently registered through CIPRO, on an ongoing daily basis, to facilitate cheque and other forms of fraud. No proper due diligence is being done. Over the past two years the directors of several prominent companies have also been fraudulently deregistered, and new directors inserted. Again, the intention is to facilitate fraud of one kind or another.

For more details visit: http://www.politicsweb.co.za/politicsweb/view/politicsweb/en/page71619?oid=138904&sn=Detail

For a transcript of a discussion or to listen to a recoding on South Africa’s MONEYWEB radio please go to: http://www.moneyweb.co.za/mw/view/mw/en/page295799?oid=309657&sn=2009%20Detail&pid=287226

Panelists in the discussion includes David Alexander (who is a guest expert in our “RISK MANAGEMENT - CASE STUDIES FROM THE 2008 CRISIS” course in Johannesburg).

Automatic computer updates – How safe are they?

Automatic updates to our computers are taken for granted. But have you ever stopped to thing that there could be something really sinister lurking in the background? You just have to read this though provoking article to make you think again. Read it at http://blogs.techrepublic.com.com/security/?p=2056&tag=nl.e036

Any comments? Would be interesting to hear them.

Operational Risk

The Basel Committee has just published two new papers on operational risk which cover the results from the “2008 Loss Data Collection Exercise”. The 2008 Loss Data Collection Exercise (LDCE) is the first international LDCE to collect information on all four data elements that are used in the Advanced Measurement Approach (AMA) for operational risk in the Basel II Framework - internal loss data, external loss data, scenario analysis and business environment and internal control factors (BEICFs). The 2008 LDCE was conducted for the Basel Committee on Banking Supervision by the Operational Risk Subgroup of the Standards Implementation Group.

The results are covered in two papers. The first, “Results from the 2008 Loss Data Collection Exercise for operational risk”, focuses on internal loss data and scenario analysis as well as on operational risk capital. The second paper, “Observed range of practice in key elements of Advanced Measurement Approaches (AMA)”, covers external loss data and BEICFs as well as the observed range of practice in banks employing the AMA for operational risk.

The results provide a unique opportunity to assess operational risk data and practices across regions, thus furthering the goal of promoting consistency in implementation of the Basel II Accord. The findings also present an opportunity for banking institutions to compare their operational risk management frameworks with those of other institutions and to identify potential areas for improvement.

Here are some of the main findings of the first paper:

• Overall, banks have made considerable progress in the collection and use of internal loss data since the previous international LDCE, conducted in 2002.
• The frequency of internal losses of €20,000 or more varies significantly across regions when the data are scaled by various exposure indicators.
• Despite the regional variation in loss frequency noted above, there is some consistency in the severity distribution of operational losses across regions.
• Most banks' scenario data extends the tail of the loss distribution beyond the point at which they have experienced internal losses. At many banks, the number of large scenarios greater than €10 million is approximately 20 times larger than the number of internal losses that are greater than this amount.
• Although the number of large scenarios significantly exceeds the number of large internal losses, the frequency of large losses implied by scenarios and internal data are broadly consistent among AMA banks.
• AMA banks have a higher frequency of internal losses greater than €100,000 than non-AMA banks, even when the data are scaled by exposure indicators. Some of this difference may be explained by the fact that AMA banks generally are larger, more complex banks with more mature processes for collecting loss data.
• Operational risk capital for non-AMA banks is higher than for AMA banks, regardless of the exposure indicator used for scaling. For the typical AMA bank, the ratio of operational risk capital to gross income (10.8%) is significantly below the alpha for the Basic Indicator Approach (BIA) (15%) and also below the range of betas for the Standardised Approach (TSA) (12% - 18%). Also, the amount of capital relative to the frequency of large losses is generally higher at non-AMA banks than at AMA banks.
  

The Observed range of practice (ROP) paper updates a 2006 report of the same name. In framing the discussion of observed practice in the measurement and management of operational risk, the update:

• Identifies both emerging effective practices as well as practices that are inconsistent with supervisory expectations;
• Highlights supervisory issues encountered in the supervisory reviews of operational risk, whether related to governance, data or modelling; and
• Provides a resource for both banks and national supervisors to use in their respective implementation processes, and ongoing development and monitoring of AMA frameworks.
  

The Basel II Framework envisions that, over time, the operational risk discipline will mature and converge towards a narrower band of effective risk management and risk measurement practices. Understanding the current range of observed operational risk management and measurement practices, both within and across geographic regions, contributes significantly to the efforts to establish consistent supervisory expectations. Through the analysis of existing practices, the Basel Committee is better able to promote the maturation of operational risk practices and support supervisors in developing more consistent regulatory expectations. The ROP paper therefore provides supervisors with an opportunity to engage individual banks in discussions of their operational risk management and measurement practices relative to their peers in domestic and international markets.

The ROP paper does not purport to define best practices. However, in the course of cataloguing and updating the range of observed practice, it is reasonable to expect the Basel Committee to begin identifying practices that might fall outside the range of what supervisors consider acceptable and to highlight effective and sound operational risk practices.
The observations in the ROP paper do not constitute new rules or revisions to the Basel II Framework. Neither does the content reduce or supersede the discretion of national supervisors to act in a manner that is consistent with their particular regulatory approaches. As a result, actions taken by Basel Committee members in response to the observations in this report may vary due to cross-jurisdictional differences in implementation legislation and supervisory approaches. Further, the status of banks accredited to use an AMA framework will not be affected by the observations and conclusions of this paper.

To download the papers directly from the BIS;
Observed Range of Practice in Key Elements of AMA - http://www.bis.org/publ/bcbs160b.pdf
Results from the 2008 Loss Data Collection Exercise for operational risk - http://www.bis.org/publ/bcbs160a.pdf