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

SIME BANK BERHADReport onMarket Risk - Treasury10 October 1997Prepared by kpmgAsia Pacific ConsultingTable of Content1.EXECUTIVE SUMMARY12.INTRODUCTION52.1Purpose of paper52.2Methodology52.3Format of this report62.4The risk environment in which Sime Bank operates73.PRINCIPAL MARKET RISKS AND KPMG RECOMMENDATIONS93.1Issues from major risks93.2Risk: Market risk strategy & risk tolerance level103.2.1Recommendation: Treasury workshop for senior management103.2.2Benefits103.3Risk: Organisation Structure113.3.1Recommendation: suggested market risk organisation model123.3.2Benefits143.4Risk: Human Resources143.4.1Recommendation: skill acquisition and knowledge transfer153.4.2The benefits153.5Management Information Systems (MIS)153.5.1Recommendation: improved management information163.5.2Benefits163.6Risk: Treasury processes and IT173.6.1Recommendation: automated processes and systems integration183.6.2Benefits193.7Risk: Price Risk & Risk Measurement193.7.1Recommendation: improved risk measurement methods203.7.2Benefits203.8Risk: Documented Policies and Procedures213.8.1Recommendation: develop a comprehensive policy, procedures and limits manual213.8.2Benefits223.9Risk: Credit Risks223.9.1Recommendation: clarify accountabilities for market related credit risk223.9.2Benefits233.10Risk: Increased Competition233.10.1Recommendation: improved customer service243.10.2Benefits244.ACTION PLANS25APPENDIX 1 RISK REGISTER33APPENDIX 2 PROCESS DIAGRAM33APPENDIX 3 - COMPARISON WITH INTERNATIONAL STANDARDS331.Executive SummaryINTRODUCTIONWe have produced two reports on market risk, focusing on “Treasury” and “Asset and Liability Management” (ALM). Both reports highlight a number of key areas in which action is required to strengthen the Banks management of market risks.We have produced two separate reports to draw a distinction between the price risk arising from the trading activities of the Bank and the asset and liability management function which is essentially concerned with the strategic balance sheet, income and funding risks. The issues in each of these reports are in many aspects different. However, the action plans designed to address these issues are the same, because both Treasury and ALM ultimately pertain to the management of market risks. Accordingly, we have produced one Executive Summary which is common for both reports. For the purpose of this summary, market risk includes all Treasury risks (e.g. foreign exchange and money markets) as well as ALM risks (e.g. liquidity and structural interest rate risks).FINDINGS· The key findings of the assessment of market risk management are:- liquidity risk is significant,- there is limited understanding of market risk and ALM and risk management techniques,- there is inadequate information for controlling and planning purposes,- there is a lack of articulation of market risk strategy and risk tolerance,- existing practices fall short of international market and regulatory standards of best practice,- price risk is currently small but there are plans to expand Treasury operations, 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.· 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.RECOMMENDATIONSThis 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.· 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.· 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.2.Introduction2.1Purpose of paperThe purpose of this report is to summarise KPMG's findings from our evaluation of Sime Bank's market risk management systems. These findings are based on extensive interview of front office, back office and senior management, review of relevant documentation (including reports and limits) and discussion of issues identified at the market risk workshop.This report is focused on market risk management. We concentrated on all areas of Treasury (foreign exchange, money markets, foreign exchange-corporate, off-shore banking) with the exception of asset-liability management which is the subject of a separate report.In this report we have made recommendations for the enhancement of risk management practices and outlined steps which are fundamental to achieve robust and effective market risk management proficiency. Our recommendations have been evaluated against regulatory international standards of market practice which were discussed in the Treasury Workshop.The analysis was carried out in August through October 1997. We have discussed the key issues raised in this report with senior officers prior to reaching our final conclusions.2.2MethodologyOur review and assessments focus on the key elements of market risk exposures by:· understanding the existing structure and policies of Treasury including how it has evolved and the perceived limitations of current practice;· identifying major market risks;· assessing current Treasury processes and practices and evaluating the robustness of controls to contain the risks associated with the planned expansion of Treasury activity; · comparing Sime Bank practices with international market and regulatory standards; and · proposing action steps and priorities to meet objectives and to mitigate the market risks.We have conducted the following steps in performing the review and assessment of the market risk systems in Sime Bank:1. During the initial “diagnostic” phase we interviewed key personnel involved in the market risk processes with Sime Bank. They included Money Market, Foreign Exchange (including spot, corporate, off-shore banking), MM settlement, FX settlement, Group Finance, Internal Audit and IT department with respect to the use of Infinity and the interface with the General Ledger.This phase provided us with a high level understanding of the Bank's market risk 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 and policy documentation, and samples of management reports utilised by the Bank in conducting Treasury activities. We re-interviewed staff to gain a more detailed understanding of Treasury activity and processes. Based on such reviews we mapped out a diagram of the Treasury processes (refer to Appendix 2). We generated ideas which enabled us to develop a more robust framework for strengthening the existing market risk processes.3.KPMG benchmarked Sime Bank practices against international standards. In conducting this benchmarking exercise we used a market risk management framework which we developed based on regulatory requirements (i.e. specified by Bank Negara Malaysia, BIS, Group of Thirty and Bank of England) and our experience in banks in the region and overseas. 4. KPMG conducted a Treasury risk workshop with management and staff in the International Banking Division, including front and back office, IT and Group Finance functions.The focus of the workshop was to identify market risks, evaluate the impact of the risks identified, compare with minimum standards and develop preliminary action steps.5. Based on the findings from the above steps, we compiled this report for senior management.6. Prior to issuing the final report, we presented our findings to the Steering Committee.2.3Format of this reportThis report is divided into the following sections:1. Executive summary.2. Introduction.In this section we describe our methodology for the review and the format of this report and make some observations about the risk environment in which Sime Bank operates.3. Principal market risks.This section is the core of the report. In each sub-section, we identify a principal Treasury risk and discuss potential problems with current practices at Sime Bank. We then provide recommendations to reduce the risk and highlight the associated benefits.4. Action plans.Based on the risks identified in section 3 and the control improvements classified in section 4, we have specified risk management enhancements and outlined the steps necessary to implement these improvements.5.Appendices.Appendix 1 - Risk register.This appendix provides details of the major risk issues identified during the Treasury risk workshop.Appendix 2 - Process diagram.This appendix provides a market risk process map based on the existing key treasury processes together with a listing of the key risks arising from current processes.Appendix 3 Comparison with international standardsThis appendix offers a composite checklist of Sime Bank practice compared with international standards (i.e. the results of the benchmarking exercise).2.4The risk environment in which Sime Bank operatesSime Bank must operate in an increasingly demanding and competitive environment. In particular, the Bank faces four major business challenges which shape its risk management needs:· recent financial market turmoil in Malaysia and throughout Asia. As the Malaysian banking and finance industry goes through the transition from being controlled and constrained, to being market driven and international, it will need to develop practices of an international standard in order to remain competitive. The ability to compete is