HSBC
RISK MANAGEMENT FOR
SENIOR BANKERS
Steve Troop
Deputy Chief Executive - HSBC Turkey
Istanbul, 20th November 2002
What today’s presentation is not…
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
Technically-focused : ‘soft’ issues
rather than the mechanics of risk
management…..

Definitive : no-one can offer a set of
‘Answers’ : all I will do today is
illustrate some - but by no means all of the ‘Questions’…..
ABC
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Today’s Presentation
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
The role of senior management in risk
management

Establishing sound risk management
principles

Some thoughts on the application of
‘risk-management-in-the-round’
ABC
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1. Senior Management’s Role
Banking is the original ‘risk business’
‘No-risk’ banking a contradiction in terms
We buy risk, we sell risk, we measure risk,
we manage risk, we (or our subordinates) make
‘risk decisions’ all day and every day ……
If ‘risk’ is the essence of banking, it follows
that the role of senior management is risk
management …….
.
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ABC
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1. Senior Management’s Role
Establishing a
culture of risk management
Strategy
Core Values / the ‘conscience of the company’
Consistency
Provide focus
Seeing the big picture - ‘joined-up’ risk
. management
Collective Management at the top of the bank
Picking the right team

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ABC
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The Role of Senior Management(2)
 Establishing a culture of risk management

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Strategy
 Every bank should have one !
 A bank’s strategy is, of itself, a statement
of risk appetite
 Review, revise , update
 ‘Test’ investment and risk decisions against
that strategy
 Communicate it internally
ABC
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The Role of Senior Management(3)
 Core Values
/ the ‘conscience of the company’
 Statement of principles
 Guidelines / handbooks as to staff conduct
 Role models : talk-the-walk / walk-the-talk
 Collective belief in the value of risk
management (If senior management don’t
believe in it, why should anyone else ?)
 Consistency
Set ‘rules’ and then apply them
 Be seen to apply them

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ABC
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The Role of Senior Management(4)
 Provide
focus:
 Risk management as a tool to achieve efficiency,
productivity and profitability

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Deployment of resources : link between risk,
return, capital employed, strategy. Measurement
and modelling is important though it is decision
makers who create the difference…….
ABC
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The Role of Senior Management(5)
 Seeing
the big picture : ‘joined-up’ risk
management
 Multiplicity of risks ;
 Credit
 Market : interest / exchange rate, repricing, availability
 Operational / technical
 Compliance / legal
 Reputational
 Complication : some of these risks compete /
some offset……
 How to pull them all together and ‘see’ the big
picture ?
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ABC
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The Role of Senior Management(6)
 Collective
management at the top of the bank ;
Is there a Top Team ? Is it a Team ? Does it
communicate ?
 Does it discuss risk management? If so, how
often?
 Shared approach to risk management /
common view - or ‘someone else’s job ?’
 How ‘honest’ is communication ? Do we
encourage intuition / feelings ?

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The Role of Senior Management(7)
 Have we picked the ‘right team ? ’
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
Balance : mix of styles / perspectives

Professional training, experience, CVs
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The Role of Senior Management(8)
 Does our organisational structure facilitate
appropriate risk management ?
Reporting lines : do these reflect the need
for independence / objectivity ?
…….or do we have the fox looking after
the hen house ?
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ABC
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The Role of Senior Management(9)
 Delegated authorities are essential to the
effective operation of any large bank: are they ;
Unequivocal ? (As to value, limits, scope of
activity, decision-making, etc)
Clearly understood by those who hold those
authorities ?
Are excesses -of-authority identified quickly
(and by whom) ?
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ABC
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The Role of Senior Management(10)
 Questions to ask - on a regular basis ;
Bonuses : do our strategies for variable
compensation complement - or compete with - a
‘risk management culture’ ?

Recognition : do we promote / advance the
careers of those who demonstrate a balanced
approach to management (considered commercial
judgment with an awareness of risk) ?

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ABC
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The Role of Senior Management(11)
Questions
to ask - on a regular basis;
Roles
& responsibilities : is risk management
embedded in everyone’s Job Description - or is
there a poachers-and-gamekeepers environment
? (‘Creative tension’ is inevitable and healthy :
internal warfare is not)
Training : does the risk-management ethos
inform / shape Training commitments and
budgets ?

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The Role of Senior Management(12)
Questions
to ask - on a regular basis;
Reputational
risk : key role of senior
management. What do we have in place to protect
us from ‘banana skins’ that will embarrass us in
front of regulators, our customers, our
shareholders, our staff, the media and the general
public ?
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The Role of Senior Management(13)
More questions ;
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
Are we compliant with legislation ? Though
at least as important……

Have we let compliance with legislation /
regulation become a proxy for managing
risks ? (Going-through-the-motions)

Do we shoot-the-messenger or are there
channels / mechanisms through which more
junior concerns can be listened to ?
ABC
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The Role of Senior Management(14)
(Yet) more questions ;
 Do
we learn from mistakes ? Formal, independent,
objective review with recommendations ? (Are these
followed up ?)
 Is information flow timely ? (It took an estimated 45
seconds for nervous stimuli to get from the tail of the
largest dinosaur to its brain - by which time, the
predator had already eaten both hind legs ……….)
 Top management meetings : shape and focus is
important. Do we spend time explaining (arguing
about?) what happened - or do we focus on what
might/could / will happen in future ?
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ABC
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2. Sound Risk Management Principles
Balance between risk / reward : we all claim to
understand the basic principles of risk/ reward. Most
of us focus on the reward……
 Identifying
future income associated with a
particular investment / lending decision is
straightforward : do we identify (quantify) worstcase risk ?
 If
we do, do we have house-limits on worst-case
risks ?
(Put bluntly, how much are we prepared - or
indeed, how much can we afford - to lose ?)
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ABC
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Sound Risk Management Principles (2)
Do we look at profitability on transactions /
relationships / business-lines ?

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Loss-leadership a fact of commercial life in
competitive markets

Loss-leadership is a tactic - not a strategy….

Do we / can we measure loss-leadership ? Do
we limit (time or value) how far we are
prepared to go with loss-leadership at a banklevel ?
ABC
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Sound Risk Management Principles (3)
Do we have a portfolio strategy ?

Have we limited activity / exposure to specific
sectors ?

If we have, can we implement it ? (i.e. is the
data accessible / is it recorded correctly ?)
 Do
we have ‘natural hedges’ ? Do these
supply the ‘balance’ we need ?
 If
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no, what hedging tools can we put in place ?
ABC
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Sound Risk Management Principles (4)
Do we demonstrate resolve



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How do we deal with policy exceptions ?
How many exceptions do we have ? (If a
large number, do we really have a policy ?)
‘It’s all about execution’ ………
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Sound Risk Management Principles (5)
Top Team involvement ;
 Collective
decisions (not just collective
discussions)
 Don’t
be afraid to micro-manage / spotcheck from time to time………
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3. Risk Management-in-the-round
A clear and obvious need to ‘bring it all
together’ :
Executive Risk Committee
 ALCO
 EXCO
 IT Steering Committee
 Board Meetings
 Audit Reports
 Contingency Management

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ABC
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3. Risk Management-in-the-round

Executive Risk Committee
 Risk
Decree requirement
 Chaired by non-Executive Director &
Board Member (Minutes for Board)
 Quarterly reviews of risk management
 No business leadership participates
 Heads of Audit, Operations, Compliance,
Legal, Credit, Treasury Control/ Back
Office, ICU.
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3. Risk Management-in-the-round

ALCO
 Weekly
(more often as needed)
 Minuted
 Standard format : specific sections on limit
excesses (credit, treasury)
 Reviews pricing, funding, balance-sheet,
P&L, profitability
 Attended by both business leadership and
risk control functions.
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3. Risk Management-in-the-round

EXCO
 Monthly
(more often as needed)
 Business leadership & top management
of the bank
 Minuted
 Reviews out put from Audit, ERC and
ALCO.
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ABC
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3. Risk Management-in-the-round

IT Steering Committee
 Quarterly
(more often as needed)
 Business leadership & top management of
the bank
 Minuted
 IT: material in any risk management
discussion plus inherent risks in IT itself
 IT’s central role as provider of numeric
tools for measurement and management of
risk
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3. Risk Management-in-the-round

Role of Audit
 Reviews
the adequacy / effectiveness of
risk controls
 Publishes formal reports &
recommendations addressed to ‘owners’
of businesses and processes.
 Timely responses required / tracked to
conclusion.
 Formal reporting line to Audit in Head
Office (London)
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3. Risk Management-in-the-round

Contingency Management
 Pre-identifcation
of possible event /
systemic risks
 Modelling tools / ‘early warning’ signals
 Business Resumption / Disaster Recovery
Plans (Test them………)
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SUMMARY
Risk management is the very essence of top
management’s role and its principal
responsibility
Top management set the tone for risk
management / risk consciousness at any
institution……
 Risks are interdependent : top management’s
job is to see ‘The Big Picture’……
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CONCLUSION
No ‘Right Answer’.. …
An evolutionary process : complacency the
greatest threat
Asking ‘difficult’ Questions - and constant
refinement of the Answers - is the most
valuable thing any senior manager can and
should be doing…..
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THANKYOU FOR LISTENING.
ANY QUESTIONS ?
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