Risk Management Lessons from the Global Banking Crisis of 2008

Senior financial supervisors from seven countries (collectively the “Senior Supervisors Group”) have issued a report that evaluates how weaknesses in risk management and internal controls contributed to industry distress during the financial crisis.

The report—Risk Management Lessons from the Global Banking Crisis of 2008—reviews in detail the funding and liquidity issues central to the recent crisis and explores critical areas of risk management practice in need of improvement across the financial services industry.

The report concludes that despite firms’ recent progress in improving risk management practices, underlying weaknesses in governance, incentive structures, information technology infrastructure and internal controls require substantial work to address.

The observations and conclusions in the report reflect the results of two initiatives undertaken by the SSG. These initiatives involved a series of interviews with firms about funding and liquidity challenges and a self-assessment exercise in which firms were asked to benchmark their risk management practices against a series of recommendations and observations taken from industry and supervisory studies published in 2008.

The report may be downloaded at http://www.newyorkfed.org/newsevents/news/banking/2009/SSG_report.pdf

Bank Lending – Some Basic Principals

By Stanley Epstein - Principal Associate

The financial world is in a pretty messed up shape at the moment. So in examining the Financial Services Authority’s proposals regarding the reform of the mortgage market in the UK I get the basic impression that I am in Alice in Wonderland, at the Mad Hatter’s Tea Party to be exact.

What on earth has happened to basic lending principles? The FSA speaks of a changed approach to a more “intrusive and interventionist style of regulation”. As a part of these proposals they set out what they refer to as “key features”, six in all.
But of the six, three should, as a matter of course, be part and parcel of a bankers’ normal business practice. A regulator should not have to tell a bank what the basic principles of lending money are. Just consider the three following “key features”;

• “Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay” – there are two conditions wrapped up in one; affordability and the lender’s responsibility regarding the borrower’s repayment ability. The first is a dead standard condition for the granting of any consumer loan. The second issue goes without saying.
• “Banning ‘self-cert’ mortgages through required verification of borrowers’ income” –this is like leaving the fox in charge of the henhouse. Third party certification of a borrower’s income is also a standard consumer credit tool.
• “Calling for the FSA’s scope to cover buy-to-let and all lending secured on a home” – lending for a home to live in, is one thing. When a borrower purchases a property with a view to letting it and generating income this is something else. Here he or she is running a business and sound lending practice should also call for additional information like details of the letting market’s potential, letting conditions, contractual arrangements with renters, refurbishment costs, insurance and other business expenses and the like. This is a commercial loan not a consumer one. It is a logical extension of the first “consumer” aspect that the regulator should be looking after both facets of the business, not just one.

There should be absolutely no need to tell a banker, never mind make it a regulation, as to what the basic principles of lending money are. Unless of course the lenders aren’t really bankers! This of course begs the question as to why these people are even allowed to be in the business of lending money in the first place? These “banks” have obviously thrown all caution and prudential behaviour to the wind in their pursuit of market share and profits.

A few days ago I railed in Blog on the Finextra website against a new range of obscene staff bonuses to be paid by Goldman Sachs (“Is this just a Bad Dream?” http://www.finextra.com/community/fullblog.aspx?id=3438 ). I wondered there whether I had awoken in “Alice in Wonderland”. Now I know I have, and I am at the Mad Hatters’ Tea Party.

Good luck to the Financial Services Authority in what they are trying to achieve.

Mobile Payments Operator M-Pesa Ventures Abroad

With the recent expansion of Safaricom’s M-Pesa money transfer service to the UK, Kenyans abroad now have an additional cash remittance avenue besides the well-known Western Union and MoneyGram services.

According to Safaricom’s chief executive Michael Joseph, the firm plans to run the Kenya-UK service for three months before expanding to other markets.

“We would like to introduce the service to Uganda, the United Arab Emirates and US, but only after we comply with regulatory issues in those countries,” said Mr. Joseph.

To send money to Kenya using the service, users will be required to identify themselves, provide the recipient’s name, Kenyan mobile number and the amount being sent in pounds Sterling.

With transaction fees ranging from $5.6 to $9.6, the transfer is converted to Kenya shillings at the day’s prevailing exchange rate, thereby guarding against exchange fluctuations as it is an instant transfer.

Currently, the maximum amount that can be transferred internationally through M-Pesa is $350 with the amount allowed per month from a single sender in the UK capped at $14,000.

M-Pesa, which was launched in Kenya in 2007, had a subscriber base of 7.3 million by end of July, served by an agent network of over 12,000, with cumulative person-to-person transfers of $2.7 billion. The volume of monthly transfers is $2.5 million.

The move to launch the service in the UK is seen as one meant to tap into the international remittances market especially from Kenyans living and working abroad.

M-Pesa Used in Job Scam

A sign of maturity in the development and use of new products is its adaptation to use by criminal elements. M-Pesa the highly successful Kenyan mobile payment system is no exception as this investigative report from Kenya’s NTV shows.

Bank Training – Critical Element for Today’s Banker

Banking has changed dramatically in the past decade. These changes have been so far reaching that the old disciplines that were core to the successful banker of the 1990s have long since relegated to the dusty back shelf.

To succeed in banking today the banker has to master a wide range of new disciplines. Although he may never become a true expert in these he or she still needs to have a sufficient working knowledge of the subject to enable a reasonable level of effective decision making.

This is equally true for bankers at the “coal face” such as those at the front desk or in the back office as well as those in the more lofty towers of head office, be they in accounting, audit, strategy, planning, operations or the like.

This is why staff training is so very critical. Bankers today need to understand the wider world, whether it is the operation of payment systems, credit cards, real time gross settlement, Swift, ACH operations, electronic payments, mobile payments and so on.

They also need to have a clear understanding of where banking and bank operations are heading – what is done today and how it will be done tomorrow. Technology continues to change the world. To keep up with these changes, to exploit them to your organizations benefit you first need to understand them. Just look at how the Mobile Phone is redrawing the banking world. New applications and processes for the Mobile Phone are being developed and launched by the day.

Of course all these changes also bring with them new dangers and risks – ways in which the ever vigilant banker and his staff may be duped. So an investment in Operational Risk Management training is also critical. What is operational risk? How it can be mitigated? What is fraud and how do you manage it? What is Business Continuity and how do you set it up? All these are key issues that the modern banker needs to know about.

Citadel Advantage offers a wide & comprehensive range of professional courses and training for commercial and central banks in the areas of; Operational Risk Management (for Basel II and for back-office risk mitigation), Specific Operational Risk Management areas including Business Continuity Planning, Anti Money Laundering & Payment Systems, and Liquidity Management.

We also offer a range of Workshops and Introductory Lectures dealing with the main areas covered in our full courses. If you can't find the exact course in our schedule that you are looking for, contact us. We may be able to build a course for your specific needs. Professional courses and training are available at a centralized venue, regionally (currently in Southern Africa & Western Europe), or In-house on your premises.

We use real-life case studies to illustrate the course material, so enhancing the learning process.
Our training courses are offered as:

• Public Courses: Citadel Advantage provide courses and lecturers to the key banking and risk training organizations around the world as well as in its own name. Ask your local or regional provider of banking and risk training courses for a Citadel Advantage course.
• In-house Courses (at your location or offsite at a location of your choice): Citadel Advantage provides cost-effective in-house training programs that allow you to determine the, depth, attendee size, length and sequence of the training within the security of your own organization. If you have 5 or more people to train our In-House training service will save you money. All Citadel Advantage courses can be run on your premises anywhere around the world.
• Tailored Courses (to meet your organization's specific needs): Citadel Advantage also provides tailored training services to the banking and financial sector. We can tailor any course to your needs or develop a new course within a relatively short period of time as required.
• CAPMen Program (the “Citadel Advantage Personal Mentoring” program): This service is designed to provide non-judgmental and professional support to those (Mentee) in senior management or aiming to reach senior management positions requiring an in-depth competency in the areas “Payments & Settlements” and “Operations Risk Management”. “CAPMen” Mentoring utilizes the full range of our experience and specialized professional courses to provide coaching, guidance and advice on a one-to-one basis, in your offices, helping you, the professional, set new goals, broaden your vision and build strategies. “CAPMen” mentoring also helps develop personal management skills such as creative thinking, decision-making, problem-solving, and effective use of resources.
  
• For details of our current course offerings please see; http://www.citadeladvantage.com/schedule.htm
  Our full course catalogue may be viewed at; http://www.citadeladvantage.com/catalog.htm

Risk Management - Focus on Fraud

CITADEL ADVANTAGE is presenting a 2-day intensive training course on Fraud within the context of Operations Risk Management in Madrid, Spain on the 22 & 23 February 2010.

Fraud can be extremely difficult to detect and studies show that most fraud occurs from or through trusted insiders. How aware are you or employees of fraud? Do they have a clear understanding of the role they play in detecting fraud? Do they understand you organization’s fraud policies and procedures?

“Risk Management - Focus on Fraud” is a 2-day intensive course on fraud and how it presents huge challenges for banks, requiring them to radically modify behavior and increase their vigilance in many of the traditional risks associated with banking activities.

Can your bank or organization cope with fraud? In fact could you even identify a fraud in your working environment? Are you maximizing your staffs’ potential to reduce fraud and error in your systems?

A major by-product of the financial crisis was the number of frauds which have come to light – frauds that had been running for years.

Don't miss this opportunity to ensure that you and your staff are able to understand fraud and its ramifications.
WHAT THIS COURSE COVERS
What you and your staff will gain from this course

• Understanding the Human Dynamic – Greed and Fraud
• Understand and identify the key Fraud indicators and Red Flags
• Understanding Operational Risk – in the context of Fraud
• Positioning the organization to successfully manage the ever-present Fraud problem.
• Successful approaches to identifying and mitigating Fraud

WHO SHOULD ATTEND?
• Senior Bank Executives
• Risk Managers
• Operations Managers
• Internal and External Auditors
• Operations Officers
• Business Managers
• Compliance Officers
• I.T. applications providers serving financial institutions
• Consultants and professionals serving the financial services industry.

For more details including a fully descriptive course brochure e-mail us at courses@citadeladvantage.com today. Please indicate FRAUD-MADRID in the subject line.

Liquidity – New Risks In Uncertain Conditions

For the past 15 years at least central banks around the world have been pushing “just-in-time” intraday liquidity as the preferred method of banks funding their real-time settlement (RTGS) accounts. While the implementation of RTGS took the settlement risk out of the majority of financial systems, it adoption and use for more and more critical financial systems (such as CLS) has exacerbated another problem – liquidity risk. This weakness has been spotlighted by t the liquidity crises that affected markets in March 2008 and, more severely, in September and October 2008. It can no longer be taken for granted that just-in-time liquidity will be available to financial market utilities at a time when multiple market participants are in danger of defaulting. This is the findings of researcher made public in the “Chicago Fed Letter” (see http://www.chicagofed.org/publications/fedletter/cflnovember2009_268a.pdf )