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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 ID’s and Passwords to
access the following for a period of one week;
 Entire suite of e-Learning & Reference Solutions
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• Please provide your Email ID’s to send the access codes

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©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 institution’s 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.
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©2005 KESDEE Inc. All rights reserved.

Focus group discussions and interviews  Survey Results of Best Practices  A Plan of Action: How to Implement Best Practices? . . Case Studies. Benchmarking Data.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.

Interviews with CEO’s / Senior Executives  Annual Updates .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 .

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.

Liability. Off-Balance Sheet Items) . not Fragmented Approach (Asset.Global Best Practices in Risk and Treasury Management Integrated.

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 • Best practice institutions take a proactive.

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. .

pre-specified. and measurable.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.

a short-term objective. and Economic Value of Portfolio Equity (EVPE).Global Best Practices in Risk and Treasury Management • Best practice institutions control both the volatility of Net Interest Income (NII). a long-term objective. • A change in the EVPE is a leading indicator of the quality of the future income statement. .

not over your head . not by chance • Clean bet. not by chance • Exposure by choice. The watchwords are: • Risk by choice.Global Best Practices in Risk and Treasury Management Best practice institutions manage risk. not confused bet • Bet with your head. not eliminate them.

.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.

Financial “ Value Chain " • Risk Management Advisory Services • Structured Products .Global Best Practices in Risk and Treasury Management Integration of Credit and Market Risk Money Vs.

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 include: • On-Balance Sheet Business Strategies • On-Balance Sheet Investment/Funding Strategies • Off-Balance Sheet Strategies . They ensure that there is a fit between different 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.

) Best practice institutions have the following elements that constitute a sound risk management system: 1. procedures and limits 3.. Comprehensive internal controls . monitoring and management information systems 4. Active board and senior management oversight 2.Global Best Practices in Risk and Treasury Management Risk Management Infrastructure (Contd. Adequate policies. Adequate risk measurement.

• All need to march to the same beat of the drum .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. is sensitized to the issues of Risk Management. Every employee of the institution.

they believe that "one size does not fit all" . • The policy statement is customized and is not a "cookie cutter" .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.

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

and timely . concise.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. relevant.

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.

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

Global Best Practices in Risk and Treasury Management Derivative Strategies Best practice understand Management. strategies particular. The watchword is “ Keep It Simple. Smart ". institutions derivatives in follow simple. Risk exotic . for they easy-to- their avoid products/leveraged structures.

.Global Best Practices in Risk and Treasury Management Analytical Framework • Best practice institutions use an eclectic mix of analytical techniques such as gap analysis. • No single technique is regarded as better than the others by best practice institutions. and value at risk depending on the structure of the balance sheet and target variable being measured. They view these techniques as complementary diagnostic tools. duration. simulation.

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 .

They strive for a judicious balance between "tight controls" and "loose controls".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. .

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.