ENTERPRISE-WIDE RISK MANAGEMENT & BASEL II GAP PROPOSAL

JANUARY, 2012

BACKGROUND

INTRODUCTION
The global economic crisis of the last two years has continued to challenge the way firms do business, including how they anticipate and manage their risks and therefore the efficient deployment and management of their capital. At the same time, global and local regulators have taken a closer and tougher view on how they evaluate and oversee financial institutions in the wake of high levels of operational and earnings volatilities. There has therefore been an emergence of various regulatory reforms and the emergence of higherlevel guidelines such as the recent Basel III. It is in this regard that the bank is evaluating its current risk management framework with a view to further up-scaling it in line with Basel II requirements while embarking on bank-wide sensitization (Training) and automation of its risk management system. This will enable it achieve an enhanced management of all the banks risk exposures and ensure increased financial stability and earnings growth, leading to a more effective actualization of the banks mandate.

PROJECTS

PROJECT 1

ENTERPRISE-WIDE RISK MANAGEMENT FRAMEWORK (ERM) DESIGN & IMPLEMENTATION

PROJECT 2

BASEL II GAP ANALYSIS & IMPLEMENTATION

ENTERPRISE-WIDE RISK MANAGEMENT FRAMEWORK (ERM) DESIGN & IMPLEMENTATION

OVERVIEW OF ERM
Enterprise-wide Risk Management is a process for identifying and prioritizing the critical risks facing your organization, quantifying their impact on financial and strategic objectives, and implementing financial and organizational solutions to address them.
1. Risk management is a systematic,
critical risk-focused activity

2. Risk is quantified to make

informed business decisions

3. Risk management is an integral part of

strategic planning and budgeting

4. Pricing, capital allocation, performance

measures consider potential risk as well as returns

5. Risk is not automatically avoided, but weighed against opportunity to optimize risk versus return 6. Risk mitigation/financing focuses on events and volatilities that could compromise financial and strategic objectives

OUR ERM FRAMEWORK

Our ERM solution defines essential components, suggests a common language, and provides clear direction and guidance for strong Enterprise-wide Risk Management. It reviews the existing operations, enhances and installs the following framework components: Strategic framework top-driven Risk Education and Culture Risk Philosophy and Appetite definition Risk Management Objectives Organisational framework Board and Management Committees Risk Function structure, staffing, responsibilities Bank-wide linkages line, audit, Internal control, etc Operational framework Risk Policies, Processes, Procedures Analytical framework Risk Identification and listing Risk Metrics, Measurement and Management methodologies Linkage with Budgeting and Strategic Planning Reporting framework Reporting templates Responsibilities and frequency Technological framework Control and compliance framework Internal supervisory framework Risk-based internal Audit self-assessment templates
7

PROJECT BENEFITS
It is expected that at the end of the project, the overall benefits should include the following: Definition, formalization and communication bank-wide, of a top-driven, focused and consistent risk philosophy and appetite, and the development of a sound risk culture. Evolution of a robust ERM framework which helps identify, measure and manage all forms of risk facing the bank. Ability to analyze business unit risks across the bank enabling better understanding and comparison of risk across functions and business units. Improvement of capital efficiency and cost savings through more effective management of internal resources and capital. Ability to align the banks corporate strategy with its risk tolerance level Evolution of a risk performance measurement approach which provides the basis for sound business decision-making. Compliance with the Central Bank of Nigerias risk framework and risk-based supervision guidelines. Implementing a framework which ensures effective overall capital management on a consolidated basis. This includes appropriate structure covering credit, market. Operational and liquidity risks including policies, guidelines and procedures. Develop appropriate risk measurement metrics and indicators recognizing the business objectives and competitive positioning

PROJECT SCOPE
The scope of work under our ERM Framework design is as follows:
Business Risk Profile Appreciation
This involves an in-depth scanning of the internal business environment, regulatory requirements, business strategy/plans using our proprietary integrated Risk Assessment Tool IRATTM to determine the current and potential risk universe This is a thorough examination of the existing risk management framework and practices using our 8-framework approach. It also involves best-practice benchmarking against global peer institutions. Based on the outcome of the situation assessment, a best-fit enterprise-wide risk management framework is designed across our 8- framework approach

Situation Assessment

ERM Framework Design

Implementation Roadmap Development

In order to ensure ease of implementation, we work with the counterpart teams to evolve an implementation road map for the designed framework.

PROJECT METHODOLOGY AND ACTIVITIES

The tasks to be performed under each broad activity are as follows: Project Planning and Organization Business Case Analysis - Risk Profiling
Counterpart Team Formation Work Plan Presentation and Amendment Work Stream Allocation and Briefing Project Inauguration Meeting and Steering Committee Formation

Strategic Plan Review - Current and Future Business Projection. Proof-of-Concept Session Identification of Core Activities - Business and Support Functions Risk Identification and Impact Analysis - IRATTM Development of Risk Profile Report
Assessment of the existence and adequacy of current frameworks to support risk management. These are Strategic, Governance, Analytical, Operational (Process), Information Reporting and Performance Management, Technological, Compliance and Control . This will be done through a thorough review of existing documentation and practices using desk top review and interviews with key stakeholders. -ERM Diagnostic

Current Risk Management Framework Assessment

Policy Framework Evaluation

Current Policy Document Review This will be done to ascertain the relevance and completeness of existing polices in order to ensure risk identification, impact assessment, measurement and management . These must cover all identified risk areas - current and projected. Use Policy Checklists - ERM/ Risk Policy PacksTM
Determination of benchmark parameters and institutions. Comparison of current risk frameworks with practices in benchmark institutions using proprietary Risk Framework Evaluation Templates Scoring of current frameworks against benchmark institutions. Basis of scoring must be agreed with the client and standardized.

Best Practice Benchmarking and Gap Analysis

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PROJECT METHODOLOGY AND ACTIVITIES

The tasks to be performed under each broad activity are as follows:
Production of Draft Gap Report Presentation of draft Gap Report to Counterpart Team, Steering Committee and Board Production of Final Draft Report recognizing comments from presentations

Gap Report Writing And Presentation

Framework Design

Design of frameworks to cover all identified core risks based on the Gap Report. This design cover Strategic, Governance, Analytical, Operational (Process), Information Reporting and Performance Management, Compliance and Control, and Technological frameworks. Provision of, as much as possible, the options to the design framework and an explanation of the rationale. Presentation of draft design framework to Counterpart team, Steering Committee and Board and collation of feedbacks/comments. Submission of final design framework to the institution covering each of the identified risk areas
Development of implementation roadmap with counterparty team and its finalization Provision of on & off site guidance to the counterpart team to generate a road map Project Closure

Development of Implementation Roadmap

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PROJECT 2- BASEL II GAP & IMPLEMENTATION

OVERVIEW OF BASEL II
The Basel II Capital Accord is a reality for financial institutions in Nigeria and the global markets with its strategic benefits for sound and safer business practices and controls, beyond the compliance requirements. The accord requires banks and related financial institutions to deploy detailed risk quantification methodologies and operating processes and make adequate capital provisioning for the risks they carry. The Central Bank of Nigeria has also commenced plans to provide guidelines to the banks in Nigeria in respect of their capital adequacy. This is to ensure that banks not only estimate their earnings but also their risks and in turn set aside corresponding capital. The schema below captures the framework of the accord:

Recognizing the strategic benefits of the Basel II accord, the bank is willing to embark on implementing its requirements. Some of the observed benefits of the Basel II Implementation project are as captured in the next slide:

PROJECT BENEFITS Basel II

In keeping with the brand and corporate vision, the bank will meet international best practices and local regulatory expectations on Basel II.
The Basel II project will enhance the board and senior managements ability to understand how much capital flexibility exists to support the risk appetite of the bank. An installed Basel II framework will enable the banks management understand capital requirements under different economic and stress scenarios and institutionalize the culture of stress testing which is necessary for effective risk and earnings volatility management. A Basel II framework builds and supports the linkage between the banks risk and capital and ties performance to both. It strengthens the banks position to respond to the increasing focus on capital management and a better appreciation of the firms risk profile and the capital implications of same.

While this will be an evolving perspective, it helps the banks ability to comprehensively evaluate and document all risks and substantiate appropriate capital allocation to the supervisory authority.
Considering the amount of work done to date by the bank, the objective of this first leg of the project is to get a clear evaluation of all additional work if any, that needs to be done to bring the bank into full compliance with Basel II requirements. Following this, there may then be a next leg to bridge observed gaps.

SCOPE OF WORK

Basel II

SCOPE OF WORK
1.
DIAGNOSTIC PHASE

2
PROOF OF CONCEPT

3 GAP ANALYSIS

POST GAP ANALYSIS

-

a. Questionnaire Administration

a. Basel II Workshop

a. Basel II Gap Analysis

Mandate for Full Basel II Road Map

Implementation

b. Risk Management IT architecture

b.
Basel II IT and Data Architecture Meetings

b.

Recommendations,
Basel II Road Map Design & Report Submission

METHODOLOGY

1. Diagnostic Phase
# Task

METHODOLOGY
Description Timeline Deliverables

Risk
Management Questionnaire Distribution

i.

A Request for Information paper will be

sent to the bank with dozens of relevant questions for understanding:

3 week

Duly filled
questionnaire received from respondents

Overall Credit Risk status in the bank

(rating models, IT systems and main data entities, credit approval/denial processes, etc )

Overall Market Risk status in the bank (Risk factor data bases, VaR calculations, limits policies, Market risk control policies,)

METHODOLOGY
# 1 Task Contd Overall Operational Risks status in the bank (Loss events data base availability, Description Timeline Deliverables

internal procedures for identifying

Operational risks, KRI calculations, frequency/severity assessment of potential loss events, ) ii Risk Management IT architecture (core banking system, existing risk management systems, infrastructure, main data entity, )

2. PROOF OF CONCEPT

METHODOLOGY

#
2

Task

Description

Timeline
1 week

Deliverables
Information about Basel Framework, Risks status and risk management vision in THE BANK

Workshop i. A joint 1 week workshop will be scheduled in which we meet relevant business teams in the bank (Retail division, Corporate division, Risk Management division, Credit Cards division) and go through answers given. In the meetings we will discuss the Bank's vision for implementing Basel II and Risk management best practice as well as understand the current status at different areas of activity.

METHODOLOGY
# 2 Task Workshop Contd. ii. Conduct of meetings with IT staff for reviewing IT and data architecture. In the meetings, we will share our Basel II and Credit Scoring data schemes which include the full data model required for implementing Basel II on the Description Timeline Deliverables

Standardized Approach and FIRB. During the

meetings we will seek to evaluate the availability of main data entities, as described in our data schemes, in THE BANK data environment

3. Gap Analysis & Reporting # 3 a. Analysis of meetings information ii. Task i.

METHODOLOGY
Description Writing down Credit, Operational and Marketing Risk status chapter in gap analysis report, based on meetings with THE BANK teams If necessary, contact relevant persons in the bank (by phone) in order to clarify and get further explanations about vague points. Timeline 3 weeks Deliverables Approved current Risk status chapter in gap analysis report

iii.

Send paper to THE BANK for approval

METHODOLOGY
# b. Recommenda tion on roadmap and actions ii. Task i. Description Writing down list of gaps between current Risk status and the Bank's goals for implementing Basel II Writing down recommended roadmap, work plan and actions needed for filling gaps. Send first draft to THE BANK for approval Timeline 3 weeks Deliverables Draft of whole gap analysis report

needed for
filling gaps

METHODOLOGY
# c. Presenting gap analysis report Task i. Meetings Description in THE BANK site Timeline with 1 week Deliverables Basel II gap analysis report

management to present the gap analysis results and roadmap for Basel II

to THE BANKs
management ii.

implementation
Taking comments from THE BANK teams after gap analysis presentation

presentation

d. Submission of final report

i. ii.

Fine tuning of the gap analysis Sending THE BANK final report

1.

week

Final Basel II gap analysis report

CREDIT RISK DELIVERABLES

Current Credit Risk status: portfolio, credit approval/denial processes, rating models Current Credit Risk IT status (operational systems, data bases, overall data tables, analytical systems) Gaps founded between current status and Basel II regulation Roadmap, work plan and action items for performing Basel II : By the standardized approach By the FIRB approach Optional Data schemes (data field level) for performing : Basel II standardized approach PD modeling for retail & micro-business customers (FIRB) PD modeling for mortgage customers (FIRB) PD modeling for SME & corporate (FIRB) Each data scheme includes several data tables containing around 120 fields (and connections between the fields) needed to be collected in order to perform Basel II (Standardized/FIRB approach).

BASEL II GAP REPORT SUMMARY

The Basel II Gap Analysis Report will contain the following: CREDIT RISK Banks goals in the field of Credit Risk portfolio reporting, Credit Scoring and Rating, Preparations for possible Basel II regulation, Current Credit Risk status in THE BANK (portfolio, credit approval/denial processes, rating models) Current Credit Risk IT status in THE BANK (operational systems, data bases, overall data tables, analytical systems) MARKET RISKS Banks goals in the field of Market, VaR calculation , preparations for possible Basel II regulation Current Market Risk status in THE BANK Current Market Risk IT status in THE BANK (operational systems, data bases, overall data tables, analytical systems) OPERATIONAL RISKS Banks goals in the field of Operational risks, Key Risks Indicators, Preparations for possible Basel II regulation Current Operational Risk status in THE BANK

REPORT SUMMARY
GAP ANALYSIS Gaps founded between current status and Bank's goals Roadmap, work plan and action items for filling the gaps : By the standardized approach By the FIRB approach Annex 1 Basel II regulations Background Annex 2 - Data schemes (data field level) for performing : Basel II standardized approach PD modeling for retail & micro-business customers (FIRB)

PROJECTS Roadmap

ROADMAP
WORKSTREAMS YEAR 1 YEAR 2

Q1
ENTERPRISE-WIDE RISK MANAGEMENT CONSULTING BASEL II GAP ANALYSIS
(Credit, Market & Operational Risks)

Q2

Q3

Q4

Q1

Q2

Q3

Q4

6 MTHS

6 MTHS
12 months (Pricing subject to the outcome of gap analysis)

BASEL II DESIGN/ IMPLEMENTATION:

OUR FOOTPRINTS

CONCLUSION
We thank you for the opportunity to forward this proposal, and will be pleased to discuss with you any further customization which may be required on our methodology, time frame and pricing (after an assessment of the actual scope) that you may desire.

We eagerly look forward to working with you on this mandate and commend your desire to further strengthen firm-wide Risk Management