Professional Documents
Culture Documents
Ews Indaba e L
Ews Indaba e L
(EWS)
by Ludwig Ehard
1. Functions, Features and Use of the EWS
1. The Role of EWS in Supervision
1. Functions of the EWS
2. Development of the EWS
3. EWS as a supervisory tool
2. Addressing the root cause: the role of policies, instruments and internal control
The EWS is the neural system of a CFI
Profitability Liquidity
Strategic crisis crisis crisis
Time to act!
an individual CFI
(Apex Institutions)
CFI itself
Managing a CFI without EWS is like …
…driving
a car without lights in a
moonless, deep black night!
Interventions follow standardised procedures that do not take into account the specific
circumstances of the CFI
Ratios are used to encircle problems that arise from the operating structures of a CFI
The assessment of deviations from a given benchmark is not closing the supervision act
but triggering the virtual process oriented supervision (on-site-monitoring)
How does the EWS differ from regulatory norms?
5.
Do we need specific EWS for CFI?
...are smaller
• Some CFI bear high concentration risks (e.g. Work based CFI – one company)
1. Risk 3. Reserves
1
2 3
2. Profitability
5
4 7
6
9
Information areas CAMEL vs. EWS
Area Subarea
1.1 Credit Default Risk
1. Risk 1.2 Credit Concentration Risk
1.3 Structural Liquidity Risk
1.4 Interest Rate Risk
2.1 Profitability
2. Profitability and Growth
2.1.a Miscellaneous Income
2.2 Growth
3.1 Capitalisation
3. Reserves (Buffers) 3.2 Provisioning
3.3 Liquidity Reserves
4.1 Interest on Loans
(4. Competitiveness) 4.2 Interest on Deposits
4.3 Dividends
5. Idle Assets, 5.1 Idle Assets
Operating Cost 5.2 Operating Expenses
• appropriate IT infrastructures
• absence of internal control systems incites credit officers and managers to gamble and particularly to
whitewash credit reports
• 2. Selection of indicators
• Any mechanical usage of ratio systems without incorporation of common sense and further
qualitative judgement is a risk in itself.
• The output of mechanised off-site EWS is therefore not to be considered as a final judgement but as
a valuable tool supporting further analysis
• The EWS should enable the analyst to generate intelligent questions about the operations of an CFI
that address the root causes of deficiencies. Instead of leading the analyst astray with a tangled
mass of ratios
Aggregation of indicators
- Rating scores also seem to be a very convenient tool to simplify and standardise
the supervision process.
•The utmost goal of the EWS is not to calculate a precise probability of default but to
identify CFIs that face problems.
• (2) Aggregate scores usually cover only part of the entire business and insufficiently
mirror the linkages among ratios.
•This is why composite ratings can be manipulated once the fixed weights are known.
Rating systems are not appropriate for early warning
purposes of CFI
C Capital
A Asset Quality
M Management Fixed
Weights Composite
Rating Score
E Earnings
L Liquidity
S Security
Core problem of ratings based on weighted scores
4. Core features of the new EWS: renouncement of weighing, database and benchmarks
4.Do the procedures that are actually practised show any internal control
gaps? Are they prone to operational risks, especially fraud risk?
Ludwig Ehard
Director Regional Program – Africa
German Co-operative and Raiffeisen Confederation
DGRV – Deutscher Genossenschafts- und Raiffeisenverband e. V.
Pretoria, South Africa
lehard@dgrv.coop