Money Moves

Calculating chance

by Rachel Sproston

Risk management hot in the shade

Miranda Kwok, executive vice president and chief risk officer
China Construction Bank (Asia)
Photo: Wallace Chan

Some 20 years ago the notion of banking "risk" was linked primarily to credit risk. If a bank could effectively manage and reduce its credit risk, there was technically no other risk the bank could find threatening. Today, the concept of banking "risk" has broadened and can be categorised into eight different sectors — credit, operational, market, strategic, reputation, liquidity, interest rate and legal.

Miranda Kwok, executive vice president and chief risk officer, China Construction Bank (Asia) has witnessed this transformation first hand. "When I began my career I soon discovered that risk permeated the entire banking spectrum. I was therefore exposed to different banking departments and specific functions which provided me with useful learning opportunities," she says.

In essence, this firm foundation covering each individual banking segment ensured Ms Kwok was well prepared for promotion to chief risk officer (CRO). Dealing with personnel and risk management issues in the business, finance and human resources areas of the bank gave Ms Kwok a solid grounding which facilitated her "natural migration" to the new position. She recalls taking the post "without fear" feeling ready to assist the bank with both strategic and business planning.

Ms Kwok's responsibilities now include analysing and managing strategic risk, and devising plans which detail objectives for the bank in the next five to 10 years. "A CRO must look at the market closely, devise strategies and ensure key performance targets are hit, regularly updated and benchmarked," she says, underlining also the importance of having the entire banking staff on board, on target and positive about any new initiatives. "Compliance is everyone's job. Staff must embody this culture of compliance for the bank to truly succeed," she adds.

Surgical precision

The degree of precision involved in modern banking risk assessment is now greater than 20 years previously. Ms Kwok explains that in the past there were fewer tools and methodologies available for use in the process. Banking staff analysed individual cases reaching conclusions as to how much to lend, to whom and at what rate more from the judgment based on past experience. Client/banker relationships were key as well as family assets, earning power and the level of collateral a customer could provide.

"Nowadays, scorecards are an essential component of risk assessment," adds Ms Kwok. These are statistically derived and determined by factors as diverse as age, income, education, residential address and loan tenure. "However, scorecards still cannot replace human judgment and experience is a key part of the process," explains Ms Kwok.

Regarding risk and reward, Ms Kwok stresses, "We look for sufficient returns for the risk taken." Take for example the pricing of residential mortgages which Ms Kwok believes is not sensitive enough to differentiate the levels of risk. In essence, with a 30 per cent down payment most buyers in Hong Kong can secure the same low interest rate on a residential mortgage. However, from a banking perspective, the level of risk differs for each client as it is dependent on their specific set of circumstances. "Aligned risk is smart risk," advises Ms Kwok.

Professional filter

Since the bank's loan portfolio constitutes a major portion of the total assets, the predominant risk is still credit risk. However, of growing importance are daily operational risk, market risk and compliance risk. The bank has three clear lines of defence to minimise such risks. At the helm are frontline banking staff who are trained to react swiftly to cases of suspected money laundering and alert the associated authorities. Beyond front office staff is the second tier which involves legal, compliance and internal controls. Finally, the audit team forms the final net which challenges procedural discrepancies.

According to Ms Kwok, at CCB risk awareness permeates the entire institute. "Our management team walk the talk regarding risk management and we have well-established training programmes in all areas. In short, the company takes proactive steps to cultivate an atmosphere of risk awareness and its importance is instilled in every employee," she adds.

Regarding the future of risk management at CCB, Ms Kwok recalls the days when "no-one volunteered for risk management". She notes that the situation is now changing and analytical people are beginning to discover their talents are well rewarded if they choose to take the risk assessment path. "People who enjoy statistics, economics and analysing quantitative models fit perfectly. I am looking forward to seeing more younger people join our team and help create a dynamic force which will drive the bank forwards," she concludes.

Risky business

  • Banking risk now broader and multifaceted
  • Company cultivates atmosphere of risk awareness
  • Dynamic young people readily embraced

Taken from Career Times 28 March 2008, p. A10
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