Market, credit, operational, liquidity, regulatory, reputation

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Market, credit, operational, liquidity,
regulatory, reputation What is the biggest risk
to a financial services organisation?
Leading the risk profession

• Peter Docherty BA (Hons) MIRM ACII
• Chairman IRM SIG Financial Services

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Agenda

• Overview of the IRM SIG Financial Services
• Understanding the linkage between risk categories
• Case study and feedback
• Key challenges for the future
• What this means for risk professionals
• Close

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Overview of the IRM SIG Financial Services

• Meet quarterly to discuss key risk themes in the
  financial services sector
• 70 members
• Opportunity to share good practice across
  different market participants and disciplines
  e.g. banking, insurance, advice
• CPD accreditation for participants
• Open to IRM members and non-members
• More information
• www.theirm.org/events/financial_services_erm.htm

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The rear view mirror

• The past 3 years have been unprecedented
• Failure of numerous large institutions across the
  globe
• Large-scale government support of the financial
  system
• Coordinated economic stimulus activity
• Record low interest rates
• Regulatory reforms
• The above promotes the need to continually
  strengthen risk management capability, however,
  it also highlights the possible inadequacies
  historically

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Learning from the past Rogue Trading
In 1995 Barings collapsed after a Nick Leeson, a
trader in Singapore generated losses of 900m
through a series of rogue trades, caused by
serious control failures
This did not stop the following

• During 2008, Societe Generale reported a loss of
  4.9bn due to a number of unauthorised trades

And another
And another
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Expecting the unexpected

• The last 3 years has seen the demise of
  significant local, national and global financial
  services firmsbut what caused these trusted
  brands to fail?

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Complexity of business failures

• Often, there will be numerous factors that lead
  to the collapse of an organisation e.g.
• Inappropriate business model
• Inadequate systems and controls
• Poor oversight and governance
• External influences
• The interlinked nature of risks requires an
  appreciation of all risk types, consider this

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Case Study

• At your table, choose one of the companies from
  the previous slide and discuss what caused their
  eventual failure, consider
• Business Model
• Credit
• Liquidity
• Market
• Operational
• Governance
• Each table provide a brief summary of conclusions
  5 bullets

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Case Study Northern Rock

• Northern Rock failed due to a variety of
  reasons
• Non-standard funding model
• Aggressive expansion
• Dependency on stable global economy
• Poor governance leading to flawed decision making
• Ultimately, a number of risks materialised that
  eventually resulted in nationalisation

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Key challenges for the future of the FS industry

• Continued economic uncertainty
• Impact of unraveling the Quantitative Easing
  programme
• Rising interest rates / inflation
• Double-dip recession
• Regulatory developments
• The Walker Review on Corporate Governance
• Capital regime reforms
• Solvency II
• Basel III
• Retail Distribution Review

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Key challenges for the future of the FS industry

• Regulatory supervision
• Intensive / intrusive supervision of larger firms
• Greater focus on individual responsibilities and
  accountabilities of senior management
• High profile enforcement action / fines
• A return to the pre-credit crisis practices
• Risk v Reward not adequately monitored
• Fewer market participants greater opportunities

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What does this mean for risk managers?

• Risk managers will need to adopt the CRO
  perspective
• Appreciation / awareness of other risk categories
  multi-discipline approach
• Understand consequential impacts across risk
  categories
• Greater depth / breadth of industry knowledge
• Greater profile for risk management in FS firms,
  however, this equates to higher expectations
• Need to instigate change before regulators impose
  their requirements
• Increasing need to access and influence senior
  management
• Increasing focus on risks within the business
  model
• Increasing importance on personal skills,
  credibility and persuasiveness

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What does this mean for risk managers?

• Greater scrutiny of risk functions and risk
  managers
• Demonstrating success
• Increasing demand for skilled individuals with
  appropriate knowledge and experienceand
  qualifications!

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Questions?

• Thank you for your time

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