毕博上海银行咨询Sime Bank Market Risk ALM Report.doc

sime bank berhad report on market risk: asset and liability management 21 october 1997 prepared by kpmgasia pacific consulting table of content 1.executive summary1 2.introduction2 2.1format of this report2 2.2methodology2 2.3overview of alm process and -there is difficulty in implementing alco decisions. the implications of this assessment in the immediate period: -it is difficult to maintain liquidity in adverse market conditions, -there is potentially a higher cost of funds (retail and wholesale), -it is difficult to respond to changes in the business environment and economic climate; and -there is a limited range of tools to minimise market risk. kpmg asset and liability management reportpage 2 the implication of this risk assessment in the long run may be an uncompetitive response to banking sector liberalisation and deregulation. kpmg therefore believes that a significant market risk enhancement programme is urgently required. the first priority should be reducing liquidity risk. liquidity risk is a pressing issue. there is limited forward planning for short term funding requirements or long term financing needs. furthermore, there is difficulty in attracting customer deposits and hence heavy reliance has been placed on interbank activity. consequently, many interbank lines are fully utilised. recommendations this report presents recommendations for the enhancement of risk management practices in each key risk area identified. the key risks include: liquidity risk; market risk strategy and risk tolerance; organisational structure; management information; risk measurement; documented policy and limits; processes and it; and market related credit risk. our recommendations have been evaluated against regulatory and international standards of market practice which were discussed in the treasury and alm workshops. the following bullet points highlight our key recommendations. we recommend a series of market risk management workshops for staff to increase understanding of treasury products and risk management techniques. these should focus on managing liquidity and interest rate risk, hedging with various treasury instruments, employing various organisational models, using measurement techniques and valuation methodologies. we recommend a series of focused market risk management workshops for senior management with the aim of developing a market risk strategy including articulation of risk tolerance levels. management information systems (mis) need to be enhanced both in terms of users specifying their requirements and systems to deliver the capability in a timely manner. management and staff need to specify and identify the information they require for decision making. this is most urgent with respect to alm where information is required on the asset side (e.g. loan repricing profile, cashflow) and the liability side (e.g. deposit sources, specific hedges) of the balance sheet where data is currently unavailable. we recommend the establishment of an independent, dedicated group responsible for market risk management. we also recommend that the alm support unit is absorbed into this function. kpmg asset and liability management reportpage 3 skill upgrade within treasury by means of skills transfer from external resources can run in parallel with external recruitment to ensure the bank is immediately prepared to implement its market risk strategy and to achieve its business objectives. we have proposed a systems architecture for sime bank which provides the necessary business links for automation of manual processes and system integration in treasury. the objective is to move toward implementation of a centralised database. we recommend the introduction of more sophisticated risk measurement techniques particularly with respect to interest rate management. for example, the use of time buckets, sensitivity analysis and gap analysis. it is important for the bank to develop a comprehensive, written policy, procedures and limits manual. this should include: -establish clear roles and responsibilities, -set objectives for alm policy, -establish a clear chain of command for limit monitoring, breaches, stop-losses, profit excess, crisis management, -specify limits and guidelines for measurement and control, -tier limits and include management action triggers and detailed response; and -clarify valuation methodology and procedures. international banking needs to co-ordinate and work together with the credit division to establish a mechanism to measure, monitor, aggregate and control market related credit risk. steps should be taken to reduce settlement risk including completion of reconciliations on an up-to-date basis. further, formalisation of confirmation requirements prior to settlement is required particularly with respect to corporate clients. the bank is keen to expand its international banking activities and would like to become involved in derivative products. therefore the process of moving towards meeting international and bank negara malaysias (bnm) minimum standards is important. we encourage the bank to work towards attaining such regulatory approval with the belief that it will enable the bank to compete more effectively, particularly on two fronts: -hedging the balance sheet by using derivative products to alter the risk profile of the alm portfolio; and -providing competitive services to satisfy increasingly demanding and mobile customers. kpmg asset and liability management reportpage 4 the corporate desk should conduct more complete analysis of customer activity and co- ordinate its activity in foreign exchange, money markets, trade finance, etc. once bnm approval for derivatives is granted, the corporate desk should expand its product range to include instruments such as swaps and options. we have developed a set of prioritised action plans as the output of our review. our suggestion in relation to prioritisation and timing is set out in the following diagram. implementation of change - prioritisation and timing medium term development 9 months plus provide market risk training to staff appoint head of market risk users to specify mis requirements re interest rate/fx/liquidity risk ascertain infinity capabilities and provide training to staff specify alm mis requirements formalise follow up of alco decisions/actions set liquidity limits nostro reconciliations automated implement market risk organisation conduct senior management workshops formalise strategy and articulate risk tolerance introduce more sophisticated interest rate risk measurement techniques develop additional mis to meet user requirements extend liquidity gap report and enhance liquidity analysis develop liquidity contingency plan develop confirmation matching system (international counter parties) document policies, procedures and limits implement staff appraisal/ remuneration recommendations enhance systems integration establish mechanism to aggregate all credit risks expand corporate desk services develop confirmation matching (domestic) centralisation of database establish transfer pricing system linked to capital allocation short term development 3 - 9 months immediate 0 - 3 months kpmg asset and liability management reportpage 5 2. introduction the purpose of this report is to summarise kpmgs findings from our evaluation of sime banks asset and liability management systems. these findings are based on extensive interview of front office, back office and senior management, review of relevant documentation (including minutes from asset and liability committee meetings) and discussion of issues identified at the asset and liability management risk workshop. this report addresses all areas of alm (liquidity, price risk, i.e., including foreign exchange identifying major risks arising in relation to asset and liability management, assessing current alm processes and practices and evaluating the ability to support the banks growth strategy (i.e. by financing the growth and containing the risks); comparing sime bank practices with international market and regulatory standards; and proposing action steps and priorities to meet objectives and to mitigate the asset and liability management risk. we have conducted the following steps in performing the review and assessment of the asset and liability management systems in sime bank. 1.we interviewed key personnel involved in the asset and liability management processes within sime bank. they included alm support, group finance and treasury. kpmg asset and liability management reportpage 7 this was the diagnostic phase. it provided us with a high level understanding of the banks asset and liability management systems and enabled us to determine the major focus of our review. the results of this diagnostic phase and our preliminary observations were presented to the project steering committee. 2.we reviewed existing processes, technology, minutes of asset and liability committee (alco) meetings, policy documentation and samples of management reports utilised by the bank in conducting their alm activities. we re-interviewed staff to gain a more detailed understanding of the banks alm processes. based on such reviews we mapped out a process diagram of the alm process (refer to appendix 2). during this phase we developed our initial assessment of the roles and the strength of the alm process within the bank. 3.kpmg benchmarked sime bank practices against international standards. in conducting this benchmarking exercise we used a framework for alm which we developed based on regulatory requirements (i.e. specified by bis, group of thirty and the bank of england) and our experience in banks in the region and overseas. 4.we conducted an alm workshop with senior staff in international banking, alm support, economic and research and group finance divisions. the focus of the workshop was to provide an overview of asset and liability management, ensure all risks have been identified, evaluate the impact of the risks identified, perform a comparison with minimum standards and develop preliminary action steps. appendices 1 and 3 to this report (risk register and comparison with international standards) were developed based on the workshop and distributed to workshop participants for comments. 5.based on the outcomes and findings from the above steps we have compiled this report for senior management. 6.prior to issuing the final report, we presented our findings to the steering committee. 2.3overview of alm process the international banking division is considering the expansion of its operations in terms of size of positions and product range, including the introduction of derivative financial products. the bank is currently prohibited from the trading of derivatives until it meets bank negara malaysias minimum standards. sime bank is therefore unable to utilise various financial market instruments in order to hedge the exposure of its balance sheet (i.e. alter the risk profile of the positions). there is increased competition in the domestic retail sector. customers are becoming increasingly sophisticated and demanding. many “shop around” for the best price in the market place. some are beginning to use derivative instruments to hedge their exposures and most are price sensitive. the inability to offer the customers a full product ranges may translate into decreased customer loyalty, increased mobility of funds, increased difficulty in attracting customer deposits and lower margins; and the recent financial market turmoil in malaysia and throughout asia and the subsequent illiquid and volatile markets has highlighted the vulnerability of sime banks balance sheet and exposed the potential difficulty of maintaining liquidity in adverse circumstances. we note that the bank has already taken proactive, positive steps to strengthen its existing asset and liability management systems and processes. these steps include: establishment of an alco which meets monthly to consider asset and liability management issues; kpmg asset and liability management reportpage 9 recent establishment of a funding committee which meets weekly to tackle funding issues; consideration of systems upgrade (e.g., sendero to support alm); and engagement of kpmg to assist in harnessing a robust risk management system in the bank. we believe the bank and its senior management should continue this development and should aspire to achieve a robust, reliable and effective alm risk management system. kpmg asset and liability management reportpage 10 3. principal alm risks and kpmg recommendations 3.1major risks based on the discussion during the alm workshop, various interviews with the banks personnel, and our own assessments, we have compiled the following risk profile of the banks alm systems. the assessment is compiled following a two step process. in the first step we consider the likelihood of a risk event occurring and the consequences if it should occur. this step gives rise to a “risk rating” which is mapped on the vertical axis in the “residual risk profile” below. in the second step we consider the effectiveness of the banks existing processes in managing those risks. this is measured on the horizontal axis. details of the risks and assessments are set out in appendix 1. the alm risk profile map shows that significant risks exist, practices are below international minimum standard in many areas, and the likelihood of some risk events occurring is high. however, we note that the bank has already taken some positive steps to upgrade current asset and liability management systems and processes. we address each of these risk areas in the following sections. h hi ig gh h l lo oww s so omme e wwe ea ak kn ne es ss se es s wwe ea ak k risk rating s sa at ti is sf fa ac ct to or ry y a al lmm r ri is sk k p pr ro of fi il le e mma ap p mme ed di iu umm c co on nt tr ro ol l transfer pricing capital management policies considering alternative organisational models; considering the interface between commercial and treasury activities; determining the role of treasury, risk management, alm support, the funding committee and alco; and understanding the potential profit and loss impact of alm decisions. it would also be useful if a number of alco and funding committee members attend the proposed senior management treasury workshop (refer to our report on market risk- treasury). in this workshop they would consider the effect of using different treasury products and techniques on the treasury portfolio (or the banks balance sheet), review alternative portfolio valuation methodologies, explore the inputs needed to conduct the analysis and examine the content of the outputs. kpmg asset and liability management reportpage 12 we also recommend that at the end of each alco meeting “action steps” are formalised and responsibility is assigned for executing and communicating the decisions taken in a given time period. the risk management unit should have formal responsibility for monitoring alm implementation. 3.2.2benefits a better understanding of alm processes and treasury techniques should lead to improved decision making, a more informed strategy and an ability to minimise market threats and capitalise on market opportunities. articulation of a maximum risk level would enable alco and the funding committee to set appropriate and achievable targets and enable them to make market decisions within clearly defined boundaries. the limit ensures that proper control and measurement is applied, protecting sime bank from a loss greater than that acceptable by senior management. it should be noted however that a maximum risk level establishes a control but does not provide full guarantee that a specified loss level will not be reached or exceeded. 3.3risk: organisation structure and to deploy specialised skills effectively. at sime bank we found these features: there is not a designated senior executive whose principal responsibility is alm; there is a shortage of experience in employing asset and liability management methods and tools. there is no formal mechanism for measurement, monitoring and reporting on the execution and implementation of alm decisions and strategies; formal analysis (prepared for alco) is prepared only on a monthly basis; and kpmg asset and liability management reportpage 13 there is no formal co-ordination between alco, credit committee, funding committee relating to the loan assets and future funding requirements of the bank, (e.g., future cash flow analysis, portfolio analysis, repricing and portfolio maturity profile and future funding requirements of the bank). 3.3.1recommendation: organisation structure and framework recommendation: suggested alm organisation model in this section we set out a proposal for organisational responsibilities for asset and liability management within sime bank. we also provide some preliminary suggestions for how the proposed structure and functions should be operated. the ultimate responsibility for alm resides with the board of directors. the board will delegate responsibility for alm to an alm sub-committee (alco) of the board. while the ceo will oversee the management of the alm function, we propose that day to day management responsibility will reside with the head of alm risk management. board of directors:governance of alm oversee strategy and policy review balance sheet structure approve largest transactions ceodirect/approve risk strategy recommend alm policy monitor balance sheet structure approve large transactions approve transfer pricing mechanism risk management committee (alco) formulate and propose alm strategy recommend alm and pricing policy monitor balance sheet structure and mismatches set market and liquidity risk limits recommend transfer pricing mechanism head of alm risk managementdirect reporting l