Global Best Practices in

Risk and Treasury Management

Organized by

Indian Banks Association (IBA)

in association with Canara Bank

Date : September 26,2005

Venue: Mumbai, India
Presented By
S. L. (Sam) Srinivasulu, Ph.D
President, KESDEE Inc.
PO Box. 910207,
San Diego, CA 92191-0207, USA.
Tel: +1-858-756-8574, Fax: +1-858-756-8587
Email: srini@kesdee.com, Website: www.kesdee.com

Global Best Practices in Risk and Treasury Management

An interactive web-based version of the presentation is
available in our e-Learning and Reference Solutions
Each of you will be provided with User IDs and Passwords to
access the following for a period of one week;
Entire suite of e-Learning & Reference Solutions
eCoaches (eFRM Coach and ePRM Coach)
You will also be able to access the Job Aids / Performance
Support Tools
Please provide your Email IDs to send the access codes

2
2

2005 KESDEE Inc. All rights reserved.

KESDEE - the Genesis

The U.S. Federal Reserve Board, Washington D.C., USA
A 5 YEAR PROJECT.
The programs were;
Based on actual case studies
Dealt with all aspects of a financial institutions management
including products, Risk Management and Best Practices

Key Output Database of Global Best Practices in Risk Management

The experience and knowledge from these programs served as a

catalyst for the establishment of KESDEE Inc.
3

2005 KESDEE Inc. All rights reserved.

Global Best Practices in Risk and Treasury Management

Presentation topic covers the following:
A Framework for Analysis of Best Practices in Risk
Management
How Best Practices are arrived at ?
- Global Database of Disclosures, Benchmarking
Data, Case Studies;
- Focus group discussions and interviews
Survey Results of Best Practices
A Plan of Action: How to Implement Best Practices?

Global Best Practices in Risk and Treasury Management

How Best Practices are arrived at ?
Empirical Analysis
Disclosures
Benchmarking
Data
Case Studies
Comparative Analysis

Focus Group Discussions

with groups of Key Decision
Makers
Questionnaires - Fax
In-person - Interviews with
CEOs / Senior Executives
Annual Updates

Global Best Practices in Risk and Treasury Management

Global Best Practices in:
Asset Liability Management
Trading Risk
Derivatives
Credit Risk
Liquidity Risk
Funding
Trading
Contingency Funding Plan
Operational Risk

Global Best Practices in Risk and Treasury Management

Global Best Practices in:
Corporate Treasury Management
Risk Management Governance
Organisation
Disclosures
Policy Statements
Analytics
Performance Measurement
Various functions / Business Lines

Global Best Practices in Risk and Treasury Management

A comprehensive framework 9 part framework

Global Best Practices in Risk and Treasury Management

The strength of the chain is the strength of the weakest

link in the chain.

Global Best Practices in Risk and Treasury Management

Integrated, not Fragmented Approach
(Asset, Liability, Off-Balance Sheet Items)

Global Best Practices in Risk and Treasury Management

Best practice institutions take a proactive, not a reactive
approach to Risk Management as part of Balance Sheet
Management
The function is integrated with other business strategies.
CASE EXAMPLES

Global Best Practices in Risk and Treasury Management

Risk Approach

Global Best Practices in Risk and Treasury Management

Best Practices Institutions view Risk Management not

from the perspective of compliance or control but from
the perspective of value creation.

Global Best Practices in Risk and Treasury Management

Best practice institutions have a clear articulation of the

amount of risk to be taken. They are quantified, pre-specified,
and measurable.

Global Best Practices in Risk and Treasury Management

Best practice institutions control both the volatility of

Net Interest Income (NII), a short-term objective, and
Economic Value of Portfolio Equity (EVPE), a long-term
objective.

A change in the EVPE is a leading indicator of the

quality of the future income statement.

Global Best Practices in Risk and Treasury Management

Best practice institutions manage risk, not eliminate them.
The watchwords are:
Risk by choice, not by chance

Exposure by choice, not by chance

Clean bet, not confused bet

Bet with your head, not over your head

Global Best Practices in Risk and Treasury Management

Integration of Credit and Market Risk
Best practice institutions ensure that there is
integration between credit risk management and
market risk management.

Global Best Practices in Risk and Treasury Management

Integration of Credit and Market Risk

Money Vs. Financial Value Chain "

Risk Management Advisory Services

Structured Products

Global Best Practices in Risk and Treasury Management

Strategic Process

Best practice institutions have Risk Management

function acting as a catalyst for the formulation of
strategies. They ensure that there is a fit between
different strategies. They include:

On-Balance Sheet Business Strategies

On-Balance Sheet Investment/Funding Strategies

Off-Balance Sheet Strategies

Global Best Practices in Risk and Treasury Management

Risk Management Infrastructure

Best practice institutions have a balance sheet

management process that encompasses on-balance
sheet, off-balance sheet, and behind the balance sheet
(quality of Risk Management infrastructure) items.

Global Best Practices in Risk and Treasury Management

Risk Management Infrastructure (Contd..)

Best practice institutions have the following elements that

constitute a sound risk management system:

1. Active board and senior management oversight

2. Adequate policies, procedures and limits
3. Adequate risk measurement, monitoring and
management information systems
4. Comprehensive internal controls

Global Best Practices in Risk and Treasury Management

Best practice institutions ensure that all the employees read

from the same script and sing from the same sheet of music.
Every employee of the institution, is sensitized to the issues
of Risk Management.

All need to march to the same beat of the drum

Global Best Practices in Risk and Treasury Management

Policy Statement

Best practice institutions have a well-articulated policy

statement generally approved by the Board of Directors.
The policy statement is customized and is not a "cookie
cutter" ; they believe that "one size does not fit all"

Global Best Practices in Risk and Treasury Management

Policy Statement (Contd..)
It is articulated to be relevant to the business portfolio mix and
their strategic objectives. Rather than have an all-encompassing
compendium, they develop the policy statement as a unique "road
map" and not as a "world atlas"

Global Best Practices in Risk and Treasury Management

Policy Statement (Contd)

The policy statement provides a clear direction to the

Risk Management function
The policy statement is clear, concise, relevant, and
timely

Global Best Practices in Risk and Treasury Management

Derivatives

Best practice institutions view derivatives as a doubleedged sword - they are not an end but a potential means
to accomplishing a strategic objective.

Global Best Practices in Risk and Treasury Management

Derivatives (Contd)
Major high profile derivative disasters have one major
lesson:

Derivatives were used not in the context of or in the

pursuit of business objectives. So, the lesson is do not
put 'cart before the horse'. First, the objectives have to
be formulated and then an evaluation is to be made
whether derivatives have a role, if any, in accomplishing
those objectives.

Global Best Practices in Risk and Treasury Management

Derivative Strategies

Best

practice

understand
Management;

institutions

derivatives
in

follow

simple,

strategies

particular,

for

they

easy-to-

their
avoid

products/leveraged structures.

The watchword is Keep It Simple, Smart ".

Risk
exotic

Global Best Practices in Risk and Treasury Management

Analytical Framework
Best

practice

institutions

use

an

eclectic

mix

of

analytical techniques such as gap analysis, simulation,

duration, and value at risk depending on the structure
of

the

balance

sheet

and

target

variable

being

measured.
No single technique is regarded as better than the
others by best practice institutions. They view these
techniques as complementary diagnostic tools.

Global Best Practices in Risk and Treasury Management

Information Reporting Framework
Best

practice

institutions

share

Risk

Management

information among employees at right frequency and at

the right level of detail. They ensure that the amount/type
of information received is appropriate/necessary for the
recipients' task.
An appropriate balance between information overload and
the dearth of information is maintained.

Global Best Practices in Risk and Treasury Management

Performance Measurement Framework

A Case example on:

Hedge/Arbitrage/Speculation
Risk Based Framework

Global Best Practices in Risk and Treasury Management

Control Framework
Best Practice institutions ensure that the Risk
Management limits are articulated to place a "ring
fence" around operating managers rather than tying
their hands with rigid limits. They strive for a judicious
balance between "tight controls" and "loose controls".

Global Best Practices in Risk and Treasury Management

Best Practices institutions primary emphasis is on

Strategies

for

Exposure

Reduction

and

techniques for Noise Reduction

Examples of noise reduction: Purpose

Examples of exposure reduction: Purpose

not

on

Global Best Practices in Risk and Treasury Management

Risk Management and Treasury Management closely
linked to business portfolios
Corporate Example
Financial Institution Example

Global Best Practices in Risk and Treasury Management

KNOW WHAT YOU DO NOT KNOW: BACK TESTING

THINK THE UNTHINKABLE: STRESS TESTING

Global Best Practices in Risk and Treasury Management

How to Implement Global Best Practices ?

A Plan of Action: 3-Step Approach

Question & Answers

37

2005 KESDEE Inc. All rights reserved.

Thank you

38

2005 KESDEE Inc. All rights reserved.