Bank Management Introduction PDF

BANK MANAGEMENT ‹#› Het begint met een idee 1  WHAT IS A BANK? A bank can be defined in terms of 1. Economic function it performs i.e. Transferring funds from savers to borrowers (financial intermediation) and in paying for goods & services 2. Services i...

BANK MANAGEMENT ‹#› Het begint met een idee 1  WHAT IS A BANK? A bank can be defined in terms of 1. Economic function it performs i.e. Transferring funds from savers to borrowers (financial intermediation) and in paying for goods & services 2. Services it offers to its customers, however changing profile. Historically: Checking & debit accounts, credit cards, saving plans, loans for businesses, consumers & governments. More recent: investment banking (securities underwriting), insurance protection, financial planning, advice for merging companies, the sale of risk management services and numerous other innovative products. 3. Legal basis for its existence. Definition: A bank is any business offering deposits subject to withdrawal on demand and making loans of a commercial or business nature. Later changed into: any institution that could qualify for deposit insurance administered by the Federal Deposit Insurance Company (FDIC). ‹#› Het begint met een idee 2  LANDSCAPE ‹#› Het begint met een idee 3  BUSINESS MODEL Focus is on Commercial Banks ‹#› Het begint met een idee 4  YOUR BUSINESS MODEL? ‹#› Het begint met een idee 5  YOU MATTER. ‹#› 6 Het begint met een idee 6  MANAGING EXPECTATIONS This is the non-mathy part, i.e. we think concepts, of course with some calculations. ‹#› 7 Het begint met een idee 7  RESULTS LAST YEAR ‹#› 8 Het begint met een idee 8  HOW TO PASS AJ’S PART? Written Exam (~ 30-40%) Slides Individual Assignment (10%) To be determined by you ‹#› 9 Het begint met een idee 9  INDIVIDUAL ASSIGNMENT Published on Canvas on 29 November 2023 Deadline for submission T.B.D. Hand-in via email: [email protected] ‹#› 10 Het begint met een idee 10  THE WRITTEN EXAM Written Exam Lectures & Slides Questions on the 3 building blocks. Exam preparation in lecture on December 6. ‹#› Het begint met een idee 11  3 REGULATION Regulatory Landscape ECB Supervision Recovery KYC Sustainability ‹#› Het begint met een idee 12  2 THE CREDIT FUNCTION The Lending Process Risk Analysis Monitoring Case Study ‹#› Het begint met een idee 13  1 ASSET & LIABILITY MANAGEMENT Bank’s Balance Sheet Business Model 3 Lines of Defence Model Risks Types Trends Performance Measures ‹#› 14 Het begint met een idee 14  LET’S GET STARTED ‹#› Het begint met een idee 15  Start a … 16 16  Start a bank 17 17  Grow your bank 18  The watchdog 19  20 Protection, deposit holder + the rest 20  A Bank Assets Liabilities Capital Customer Loans Wholesale Funding Customer Buffer Deposits derivatives derivatives > The Bank is an intermediate / manager between the money lender and money supplier. > The business model concerns maturity and risk transformation, distribution and management > Retail Funding, Wholesale Funding and Capital are attracted and deposited in mortgages and investments 21 22  Revenue Model - Retail - Bank Interest income Assets Liabilities Interest Expense Capital Customer Loans Wholesale Funding Net Interest Income Customer Loan Loss Expense Buffer Deposits Fee Income derivatives derivatives Non-interest Expenses Arrangement fee, Pre-Tax non operating commitment fee, income waiver fee Service charges on TAX deposit accounts Trading account gains Net Profit & fees Additional non- interest income 23  CAPITAL ‹#› Het begint met een idee 24  Our Standard Bank Assets Liabilities Capital Customer Loans Wholesale Funding Customer Buffer Deposits derivatives derivatives > The Bank is an intermediate / manager between the money lender and money supplier. > The business model concerns maturity and risk transformation, distribution and management > Retail Funding, Wholesale Funding and Capital are attracted and deposited in mortgages and investments 25  Capital Assets Liabilities Capital Customer Loans Wholesale Funding Customer Buffer Deposits derivatives derivatives 26  The Function of Capital 1. Cushion against the risk of failure, i.e. absorbing financial / operating losses 2. Promote Public confidence 3. Funds for new development of new services and facilities 4. Regulator for growth, i.e. it should be relative to the asset side of the balance sheet 5. Limit how much risk exposures a financial firm can accept, i.e. not only safeguard public confidence but also protect government’s deposit insurance system 27  The building blocks of Capital Common Stock Preferred Stock Surplus (agio) Undivided profits Equity reserves Subordinated Debentures Minority interest in consolidated subsidiaries Equity commitment notes 28  All is relative … 29  All is relative … 30  All is relative … 31  SWEET & SIMPLE Client X Lender A Bank X Deposits The bank acts as an intermediary; Client Y and Lending Lender B various risks arise from its operations funding Client … Lender … Liquidity Market Interest rate risk Business Credit Risk risk Risk risk % Operational risks occur with every activity the bank is involved in “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events” Reputational risks are a resulting risk from each of those activities 32  3 LINES OF DEFENCE 33  3 LINES OF DEFENCE Board / Risk & Compliance / Audit Committee / Remuneration Committee 1st line of 1st line of 3rd line of responsibility responsibility responsibility External Audit - Takes Risk - Provides risk governance Provides independent Regulators - Owns Risk & framework assurance, advice & - Manage risk & rewards - challenges risk taking - monitors risk profile insights Front Line business Risk Management Internal Audit Support teams Compliance 34  1ST LINE The business and its supporting units are the 1st Line of responsibility and are accounatable for the day-to-day ownership and management of risks and controls. The 1st line takes risks, owns risks and manages risks and rewards. The responsibility of the 1st line are: Takes Risks Propose risk appetite in alignment wit the business plan; Execute business strategy and maintain risk within the risk appetite tolerance set; Accept risks within delegated authority; Provide clear, substantiated recommendations for new proposals and material change. Own Risks Embrace effective forward looking risk management by identifying, assessing, managing, monitoring and reporting on risks incurred in business activities; Own and comply with policies and standards; and Demonstrate adequate oversight of risks in business activities. Manages Risks Implement systems, models, processes, procedures and deliver appropriate training; Establish internal control practice and proactively complete risk self-assessments; and Effectively manage controls, incidents and remediate findings and actions. ‹#› Het begint met een idee 35  2ND LINE Crucially the 2nd Line supports and challenges risk taking, by providing risk expertise and oversight to confirm that the risks and controls are properly managed and risk profiles monitored. In carrying out its line two oversight duties , Risk Management maintains its independence whilst closely cooperating with the business. The responsibilities of the 2nd Line risk management function are: Governs Risk Provide strong risk and compliance governance by maintaining clear, effective and Practice and efficient risk and control frameworks; Frameworks Facilitate and challenge the development of the risk appetite and limit setting withLine1;Assess the operational effectiveness of the Risk Management Framework; Provide effective models, policies, standards and training curriculum; and Pursue a forward-looking approach towards external developments, to identify material risks and emerging themes. Challenges Proactively challenge the risk taking through analysis and opinions; Risk Taking Provide specialised advice on incidents, risk acceptance and policy gaps, as appropriate; Proactively advise on risk and compliance matters; and Provide effective and efficient approval and oversight via delegated authority. ‹#› Het begint met een idee 36  2ND LINE Risk & Control Provide independent challenge and oversight of risks, controls and control Management effectiveness; Support as necessary on the development and implementation of controls; and Perform control assurance, review and challenge on Line1risk and control effectiveness Monitors the Proactively monitors and challenges the risk taking through analysis, advice and Risk Profile opinions. ‹#› Het begint met een idee 37  3RD LINE The 3rd Line provides independent assurance, advice and insights via periodic assessments. The responsibilities of the 3rd Line Internal Audit function are: Provides independent Provide independent assurance, advice and insights on the quality and Assurance effectiveness of internal governance, internal control, risk management and risk reporting. Provides independent Perform periodic assessment of the quality and effectiveness of risk Advice and Insights management, compliance and reporting responsibilities and activities. ‹#› Het begint met een idee 38  RISK TYPES 39 39  Traded Market Risk - Traded Market Risk is the risk of financial loss from unfavourable movements in market factors, such as interest rates, foreign exchange rates, and commodity prices in relation to the Bank’s market exposures; and Non-Traded Market Risk- this is called the Interest Rate Risk in the Banking Bank (IRRBB) as the investment of capital supports the Bank’s profitability. It is expected that exposures to interest rate volatility will be appropriately managed to facilitate the financial stability of the Bank. Risk Drivers: Interest rate fluctuations; Commodity prices(including adverse impacts of climate-related, environmental or social factors); and Foreign exchange rates. 40  Measurement 41  Market Liquidity Risk – the ability to instantly position without: affecting market prices beyond their normal volatility; attracting the attention of other market participates; and compromising on counterparty quality. Funding Liquidity – risk split into two key elements: liquidity for survival - funds are available to meet financial commitments when they are due; and liquidity for growth – funds are available to take advantage of attractive business opportunities Risk Drivers: Market wide liquidity stress; Name specific (idiosyncratic) liquidity stress 42  Measurement Regulatory Liquidity Measures 43  Measurement Internal Liquidity & Funding Measures 44 45  Risk Drivers: Technology – increasing dependency on IT for the delivery of business processes as well as the increasing complexity of the IT; Regulatory Change – increasing complexity of internal processes due to the need to meet evolving regulatory requirements; Cyber- increasing threat landscape due to expanded IT perimeter (remote working) and persistent attempts by external actors to exploit IT weaknesses; People – competition and retention of skilled workforce as well as increasing demands on existing workforce; and 46  47 47  SWEET & SIMPLE Strategic Framework Risk Framework The strategic framework is the The risk framework is the responsibility of the 1st line, aka the responsibility of the 2nd line, aka risk business. management. Components are: Components are: Client targets Risk Appetite Statement Sectors Risk principles Products Risk policies Resources Procedures & work instructions Budget Competition Risk ‹#› Het begint met een idee 48  SWEET & SIMPLE Strategic Framework Risk Framework Mission & Strategy Risk Appetite Governance Principles Vision Statement & Culture & Policies Strategic & Reputational Risk Individual Business Credit Risk Procedures & Work Instructions Plans Market & Liquidity Risk Operational, ICT & Compliance Risk Key Risk Indicator Report ‹#› Het begint met een idee 49  THE RISK FRAMEWORK The Risk Framework consist out of 3 components and is described in separate documents to fit for purpose. At strategic level (board level) there is a different information requirement than at operational (branch level). The policies, procedures & work instructions should be in line with each other though. This is the task of Sr. Management as described in the previous slide. Describes Risk Framework, Risk Governance, Risk Culture including the 3 Risk Framework lines of defence model and the risk principles, the risk management process and the risk management techniques. Risk Appetite Describes the aggregated risk level XXX is willing to assume to achieve its Statement strategic goals. It also presents the Key Risk Indicators. Credit Principles The Risk Principles and the Risk Policy describe how specific / individual risks & Credit Policy are covered. Procedures & There are many procedures and work instructions. To make these explicit Work part of the risk framework it is ensured that 1. these are aligned to the instructions framework and 2. that these apply to the whole bank, i.e. all branches. ‹#› Het begint met een idee 50  RISK APPETITE Governance Template Monitoring Bottom-up approach Model Portfolio, which is the target (ideal) portfolio Every quarter, each Entity reports on its Key Risk composition. Indicators, which shows the status vis-a-vis the Agreement – based on in depth discussion - between all stakeholders: Sweet spot determines the bank’s preferred transaction model portfolio. size. A colour coding (green/amber/red) is used to − Commercial Departments Single Obligor limit indicate the maximum exposure the identify which Indicator is over the target level and − Risk Departments how far. bank feels justified in connection with its strategy, B/S and − Research Department P/L. Key Risk Indicators are designed to trigger a Sector/Product limits are presented to maintain a discussion at the right level in the bank to Stakeholders, besides the abovementioned: controllable portfolio. The emphasis is on those determine what action should be taken. Not all limits are considered hard limits. − The BRMC / Credit Committee sectors/products where risk is considered higher than normal and requires a closer view. In this context some At Board / MT level a decisions should be taken − Executive Management banks have also identified hotspots which require very what action is required when amber or red Risk − The Supervisory Board close monitoring due to a temporary higher risk or an Indicators surface. unusual risk area (e.g. earth quake sensitive areas) Once a year the Credit Risk Appetite Statement is Run-off positions are portfolios which the bank has reviewed by the Credit Department in close decided to exit from through either a forced sale or natural cooperation with the Front Office. redemption. Any adjustments (changing risk appetite, other Credit Policy adherence provides an idea how much of market circumstances, etc.) are incorporated and the portfolio follows the existing credit policy. This aims to submitted to the Board / MT for discussion and provide insight in the competitiveness of the local market approval. and/or Entities’ discipline. ‹#› Het begint met een idee 51  CONCENTRATION RISK Name concentration Sector concentration Country/Region concentration Top 25 names of portfolio as percentage Based on market view – Agri Research x is In principle only country / region where CAF (25%) of total portfolio opinion present. Single Obligor Limit, i.e. maximum exposure Percentage of total debt market for the Exceptions can be made on case by case per name specific sector basis, e.g. if the ties with the local bank are tight enough. Risk Distribution Sector percentage of total portfolio and / or Target operating model ‘Big Tickets’ maximum amount in USD Model portfolio Product concentration Hot Spots ‘Black Swans’ Different products have a different risk Can be either specific product, sector, region, Events with a (very) low probability and high profile. For some products there is a or otherwise defined part of the portfolio that impact (difficult to identify): maximum appetite e.g. carries specifically higher risk. Drought / Flooding Unsecured financing in all R&RB Entities Earthquake risk (Chile, Peru) Specific products Disease outbreaks (bollworm; Brazil grains PSA;, etc.) ‹#› Het begint met een idee 52  MONITORING Risk Appetite Strategic & Reputation MT CREDCO, ALCO & OPSCO Key Risk Statement Indicator Board of Directors 1st Line & 2nd Line Credit LPQ Report Board of Directors MT Market & Liquidity ALCO Operational, ICT & Action Compliance OPSCO Plan ‹#› Het begint met een idee 53  THE KRI REPORT Sweet Spot Name Concentration Credit Portfolio Quality Risk Parameters Key Risk Sector Credit Indicator Product Reviews Report Run-off Portfolios Stress Test Credit Portfolio Credit Controls Liquidity Risk Tolerance Market Risk Parameters Foreign Exchange Risk Tolerance Interest Rate Risk Tolerance Capital Operational Risk Tolerances Operational Risk Parameters Reputational Risk Tolerances Regulatory Limits/Caps (red threshold) ‹#› Het begint met een idee Compliance to Lender’s covenants 54 ‹#› Het begint met een idee 55 ‹#› Het begint met een idee 56 ‹#› Het begint met een idee 57 58  US VS. EU ‹#› Het begint met een idee 59  US VS. EU ‹#› Het begint met een idee 60  TRENDS 1 Continued Net Interest Income momentum driven by further ECB hikes and continued low deposit rates NII “Peak or Rapid loan repricing across the board, partly offset by weakness in loan growth, which is likely to persist until rates Already Past stabilize Peak”? Net Interest Income peak is expected by 2H2023 / 1H2024, as deposit rates increases and central banks reach the end of their monetary tightening exercise, overall offsetting a slowdown in loan demand Fees proved more resilient than feared, but too early to call it an inflection point 2 Total deposit balance decreased by ~1% vs. Dec-22, largely driven by corporate deposits shrinking by Deposit rates ~4% vis-à-vis more resilient/flat retail deposits. Growing, But Continued shift towards term / redeemable deposits up by ~5% since June 2022 Still Under Deposit repricing continues to remain manageable at ~20%, with Italy still at the lower-end of European peers Control with ~12% beta, driven by different funding mix / lower share of term deposits and Belgium EUR22Bn raise putting accelerating the beta debate Deposit rates in Europe expected to increase to ~30% by year-end 3 Operating costs in 2Q23 base increased 4.3% YoY, yet ~1% below consensus Costs? Not a Cost outlook remains mixed due to ongoing wage pressures, but manageable (Big) Problem Cost expects to increase ~2% YoY in 2023-24 ‹#› Het begint met een idee 61  TRENDS 4 Underlying credit risk trends continued to remain benign through 1H23 “All Good” on Asset Quality, Estimations for European banks remain still conservative at ~53-51 Bps for 2023-2024 for Now Commercial Real Estate as key focus area and “weak link” to be monitored across different regions 5 Strong profitability across the board and RWA reduction drove capital beats. Capital Return Still Business CET1 Ratio at 13.9% increasing by ~30 Bps with continued momentum in 2Q23 as Usual European banks expected to pay ~21% of their market cap as cumulative total cash return in 2023 and 2024 Share buy backs have for some become a Strategic Dead End, with no cash available for investment and growth ‹#› Het begint met een idee 62  TRENDS ‹#› Het begint met een idee 63  LANDSCAPE ‹#› Het begint met een idee 64  BUSINESS MODEL ‹#› Het begint met een idee 65  BUSINESS MODEL ‹#› Het begint met een idee 66  INVESTORS VIEW ‹#› Het begint met een idee 67  THE PLAYERS The 24 Largest Banks in the EU ‹#› Het begint met een idee 68  GEOGRAPHY Country view helps see trends across EU ‹#› Het begint met een idee 69  RETURN ON EQUITY Profitability - Return on Equity ‹#› Het begint met een idee 70  RETURN ON ASSETS Profitability - Return on Assets ‹#› Het begint met een idee 71  NET INTEREST MARGIN Profitability – Net Interest Margin ‹#› Het begint met een idee 72  PROFITABILITY Profitability – Cost to Income ‹#› Het begint met een idee 73  BALANCE SHEET RESILIENCE Balance Sheet Resilience – Liquidity Coverage Ratio ‹#› Het begint met een idee 74  LOAN TO DEPOSIT Balance Sheet Resilience – Loan to Deposit ‹#› Het begint met een idee 75  NON-PERFORMING LOANS Balance Sheet Resilience – Non Performing Loans ‹#› Het begint met een idee 76  SOLVENCY Balance Sheet Resilience – Solvency ‹#› Het begint met een idee 77  RATING ‹#› Het begint met een idee 78  SUMMARY ‹#› Het begint met een idee 79  SCORECARD DETAILS ‹#› Het begint met een idee 80  FURTHER READING … ‹#› Het begint met een idee 81  SNEAK PREVIEW https://www.pymnts.com/today-in-data/2019/startups-digital-banking-payments-commerce/ ‹#› 2024 Arend Het begint Jan met een ideede Jong – Tom Gruintjes 82  THE POSSIBILITIES ‹#› Het begint met een idee 83  ARTIFICIAL INTELLIGENCE ‹#› Het begint met een idee 84  SIMPLE ‹#› Het begint met een idee 85  COMPLEX / SIMPLE ‹#› Het begint met een idee 86  COMPLEX ‹#› Het begint met een idee 87  THE REGULATORY PERSPECTIVE ‹#› Het begint met een idee 88  INNOVATION IN BANKING https://www.pymnts.com/today-in-data/2019/startups-digital-banking-payments-commerce/ ‹#› 2024 Arend Het begint Jan met een ideede Jong – Tom Gruintjes 89