Financial Sector Conference Delhi, 6 June 2004 Integrated risk management from the market perspective Chris Matten

PricewaterhouseCoopers The role of capital - Operating costs Risk-free Profit/loss + Return on risk Total accounting profit/loss + Return on money - Cost of money - Cost of risk Total economic profit/loss  FIs turn two raw materials – money and risk – into products  No risk = No profits over and above the cost of money

PricewaterhouseCoopers Risk management techniques: state of play  Risk measurement is still WIP  Challenges still exist in:  Defining the problem (eg op risk)  Defining the solution (eg banking book IRR)  Implementing the solution State of readiness of internal risk models  Traded market risk  Traded credit risk  Banking book interest rate risk  Non-traded credit risk  Operational risk Source author’s estimate

PricewaterhouseCoopers Importance of Pillar 2  Principle 1: “ Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels” 1.Board and senior management oversight 2.Sound capital assessment Policies and procedures.. to measure.. all material risks Process to relate capital to level of risk 3.Comprehensive assessment of all risks 4.Monitoring and reporting 5.Internal control review

PricewaterhouseCoopers Importance of Pillar 2 (cont..)  Principle 3: “Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum” a)Pillar 1 may not reflect demands from creditors (ratings agencies) b)Type and level of activities will fluctuate c)Costly to raise additional capital in the short term d)Banks need a margin of safety above the minimum requirements e)There may be risks not reflected in Pillar 1

Financial Sector Conference Delhi, 6 June 2004