RISK MANAGEMENT TECHNIQUES AND STRATEGIES PRESENTED BY VALDA FREDERICA HENRY, PhD, CFA, GPHR FOR THE 9 TH ANNUAL GENERAL MEETING & CONFERENCE OF THE CARIBBEAN ASSOCIATION OF AUDIT COMMITTEE MEMBERS INC (CAACM) JUNE 11, 2015 SANDALS GRANDE, ANTIGUA & BARBUDA

OUTLINE  Role of the Board in Risk Management  Role of Audit Committee  Definition of Risk Management  Changing Face of Risk Management  Enterprise Risk Management  Tenets of Risk Management in the Banking Industry  Emerging Risks for Banking Sector

EPIGRAPH  If a bank is serious about risk management, then it will be serious from the top down,” (AT Kearney, 2013)

ROLE OF THE BOARD IN RISK MANAGEMENT  Identify  Measure  Monitor  Control  Verify different risks within the banking industry

ROLE OF THE AUDIT COMMITTEE  UK Combined Code sets out main roles:  Monitor financial statements  Review internal financial controls  Review internal control and risk management system  Monitor internal audit function  Review engagement and remuneration of external auditors  Review and monitor independence and objectivity of external auditors

ROLE OF AUDIT COMMITTEE II 1. Financial Reporting 2. Corporate Governance 3. Corporate control

PRACTICAL EXERCISE – ROLE OF AUDIT COMMITTEE (10 minutes)  On a scale of 1-5, rank the performance of your Audit Committee on these dimensions:  Monitors financial statements  Reviews internal financial controls  Reviews internal control and risk management system  Monitors internal audit function  Reviews engagement and remuneration of external auditors  Reviews and monitor independence and objectivity of external auditors  Reviews compliance with relevant laws, regulations, prudential guidelines and by-laws  Reviews ethical conduct of the board, management and staff

PRACTICAL EXERCISE - ROLE OF AUDIT COMMITTEE II  On a scale of 1-5, rank the performance of your Audit Committee on these dimensions:  Reviews controls with respect to the management of conflict of interests of directors, managers and employees  Manages the whistleblowing process  Reviews pending legislation  Reviews and Manages cases of fraud  Conducts environmental scans and impact on the organisation  Reviews efficiency of operations  Reviews outcome of projects against the stated objectives  Reviews its performance annually

CHALLENGES FACING THE BANKING INDUSTRY  The “New Wave” Criminal  Effecting cultural change  More stress testing  Dealing with heightened regulatory scrutiny  Facing another economic downturn (Banking Tech, 2015)  Bank funding, liquidity and collateral management remains a concern  Regulatory changes around the globe are introducing new strategic, operational and potentially systemic challenges  Cybersecurity and other geopolitical risks present unique oversight challenges  Economic and market conditions continue to pose short and long-term risks (Ernst & Young, 2012)

DEFNITION OF RISK MANAGEMENT  Definition of risk  The uncertainty that surrounds future events and outcomes.  Risk Management  The systematic application of management policies, procedures, and practices to the tasks of analyzing, evaluating, controlling, and communicating about risk issues. (Canadian Standards Association, 1997)  Enterprise Risk Management (ERM)  A process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. (COSO)

PRACTICAL ACTIVITY – RISK DEFINITION - GROUP WORK (15 minutes)  How do you define risk at your organisation?  What are the similarities?  What are the differences?  What are the implications of the differences?

Driving Forces Behind the Evolution of Risk Management 12 Stakeholders Demand that management adequately identify all material risks that impact cash flow, capital and mission Auditors Current protocols require organizations to report risks in a forward-looking context Activists Secular business and non-business activities – treatment of people, animals, … Market and Credit Analysts/ Rating Agencies Require that management strengthen its risk disclosure capabilities Investors Demand increased financial disclosure and transparency Regulators Increased interest in compliance and approval processes The Company

The COSO ERM Framework and Sarbanes-Oxley Section 404

ELEMENTS OF ENTERPRISE RISK MANAGEMENT  Aligning risk appetite and strategy  Enhancing risk response decisions  Reducing operational surprises and losses  Identifying ad managing multiple and cross enterprise risks  Seizing opportunities  Improving deployment of capital

PRACTICAL EXERCISE – ERM IN PRACTISE (30 minutes)  Using the COSO Framework, conduct a risk assessment of your organisation?  What new risks were identified during this exercise?  Were any black swans identified?

HOLISTIC RISK MANAGEMENT – ANOTHER LOOK AT RISK  Holistic risk management is a concept about managing all the risks simultaneously, where risks are considered holistically rather than independently. It is all about accountability (Chibayambuya, 2007)

THE JIG SAW HOLISTIC RISK MANAGEMENT FRAMEWORK (Chibayambuya, 2007)

TOP DOWN AND BOTTOM UP APPROACH TO HOLISTIC RISK MANAGEMENT (Chibyambuya, 2007)

LAM’S HOLISTIC RISK MANAGEMENT STRATEGIES  Know your business  Establish checks and balances  Set limits and boundaries  Keep your eye on the cash  Use the right yard sticks  Pay for the performance you want  Balance the Yin and the Yang (Chibayambuya, 2007)

CHIBAYAMBUYA’S HOLISTIC RISK MANAGEMENT CYCLE

CHIBAYAMBUYA’S RISK ASSESSMENT PROCESS (2005)

KLOMAN’S RISK MANAGEMENT FRAMEWORK  All risks emanate from global risks.  The global risks are the drivers of the organisational risks facing the banking industry and includes:  Political fragmentation  Pandemics  Nuclear proliferation  Religious fundamentalism  Population explosion  Climate change

KLOMAN’S HOLISTIC RISK MANAGEMENT FRAMEWORK II

RISK MANAGEMENT TECHNIQUES  SWOT Analysis  PESTLE Analysis  Risk Mapping  Strategic Planning  Monitoring and Evaluation Systems

RISK MAPPING  In a risk map, an organization’s risk are plotted along two dimensions, risk frequency and risk severity. It  permits the capture of a visual image of the key risks facing the firm.  resulting risk map will help in the development and prioritization of available risk mitigation and financing strategies. 25

26 LowMedium High LIKELIHOOD LowMediumHigh IMPACT

TOOLS FOR BUSINESS RISK ASSESSMENT 27 Key Risks Critical risks that potentially threaten the achievement of organization’s objectives Lower likelihood, but could have significant adverse impact on organization objectives Significant monitoring not necessary unless change in classification Periodically reassess Lesser significance, but more likely to occur Consider cost/benefit trade- off Reassess often to ensure changing conditions (move to key risks) Likelihood Almost Certain Rare Impact Low High

PRACTICAL EXERCISE – RISK MAPPING (15 MINUTES)  Map the risk identified in the ERM Exercise earlier  Has the mapping confirmed the key risks and black swans identified earlier?  What course of action do you plan to take when you return to your organisation?

CONCLUSION  Risk Management is everyone’s business  A holistic, enterprise-wide view of risks provide a more comprehensive analysis of the risks of an organisation  A risk management approach fosters accountability  Audit Committees have a key role to play in the identification, management and control of risks in an organisation

ACKNOWLEDGEMENT  We thank the ECSE for its permission to use slides no 11, 18, 19 & 20

BIBLIOGRAPHY  AT Kearney (2009) “Seven Tenets of Risk Management in the Banking Industry,” ATK earney  Banking Act, Dominica 2015  Banking Tech (2015) “Challenges for the Banking Industry in 2015,” Banking Technology  Chibayambuya J & DJ Theron(2007) “The Application of Holistic Risk Management in the Banking Industry” University of Johannesburg  Committee of Sponsoring Organisations of the Treadway Commission (COSO) (2004). “Enterprise Risk Management – Integrated Framework, COSO  Economic Intelligence Unit (2011) “Too Good to Fail? New Challenges for Risk Management in Financial Services,” The Economist  Ernst & Young (2012) “Top and Emerging Risks for Global Banking,” Ernst & Young  Financial Action Task Force (2014) “Guidance for a Rsk0Based Approach – The Banking Sector,” FATF  KPMG (2009) “Never Again? Risk management in banking beyond the credit crisis,” KPMG INTERNATIONAL.

THANK YOU!!!!!!!!!!!!!!!!!!!!!!!!!!