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5th Risk Management Forum
Wien, 10 - 11 September 2015
CHALLENGES FOR A CRO
IN A NEARLY GONE CONCERN
OPERATING ENVIRONMENT
Carmine Candolfo Chief Risk Officer
Banca Marche, Italy Disclaimer: the views expressed herein are exclusively those of the author
and should not be interpreted as reflecting those of Banca Marche
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FOREWORD Banca Marche highlights
Banca Marche is a very typical commercial retail bank, offering a wide range of
products and services…
… at the end of 2012 (last official figures available)…
was among the first 20 Italian banks in terms of total assets (23 bln)
had a very high market share in Marche Region
(25%, 23% deposits and 20% branches)
and about 1% of whole Italian market share
(1,0% loans, 0,8% deposits and 1,0% branches)
… its organization is now based on…
323 branches located in Central Italy, mainly in Marche Region
2750 employees
… and the most representative customers are
Individuals: about 380K
SME: about 100K
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Banca Marche was set up by merging Cassa di Risparmio di Pesaro, Macerata and
Jesi, three saving banks with over 150 years of history
Incorporation of Mediocredito Fondiario Centroitalia S.p.A., leasing company, and
majority ownership of Cassa di Risparmio di Loreto S.p.A. (Carilo S.p.A.)
SanPaolo Imi (now Intesa Sanpaolo) bought almost 7% equity of Banca Marche
Banca Marche carried out its last capital increase
by €180 mln in order to support its growth
On the 27th of August 2013, due to a lack of sound practices and an extreme
concentration in real estate sector, the Italian Supervisor, Banca d’Italia,
suspended the Bank Board and put the Bank under temporary management
Later Banca d’Italia, on the 15th of October, put the Bank under Extraordinary
Administration and definitively cancelled the Bank Board of Directors
Italian Interbank Deposit Protection Fund (FITD), a private-law mandatory
consortium recognized by Banca d’Italia, is now evaluating the bank
recovery through a relevant re-capitalization
FOREWORD Banca Marche history
1994
1997
2003
2012
2013
TODAY
TURNAROUND
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RISK CULTURE & RISK APPETITE
FROM GOING TO GONE CONCERN
OPERATIONAL RECOVERY
CONCLUSIONS
AGENDA
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GOING CONCERN
FROM GOING TO GONE CONCERN
GONE CONCERN
RISK CULTURE & RISK APPETITE Recent operational evolution of Banca Marche in a changing regulatory framework
More accurate
representation
of capital
adequacy
August
2013
Quick
identification
and simplified
quantification
of risk factors
undervalued
July
2013
Last
Annual
Report
(2012)
February
2013
New Top
Managers
including
CRO
June
2013
Start of
«GONE CONCERN»
with Extraordinary
Commissioners
October
2013
New
organization
model
January
2014
November
2012
Banca
d’Italia
Inspection
LIQUIDITY EVOLUTION*
CREDIT EVOLUTION*
March
2014
First
potential
buyer due
diligence
July
2015
Italian
Interbank
Deposit
Protection
Fund (FITD)
new due
diligence
(*) look
ahead
New Bank
Board of
Directors
April
2012
TURNAROUND
End of
Banca
d’Italia
Inspection
August
2013
Early
publications
of press
news on
a possible
crisis
situation
August
2012
2013 - 2015
Significant changes in International
Banking Regulation and Policy.
Continuous and rapid change in
the context of the Regulator
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RISK CULTURE & RISK APPETITE RAF: how roles and processes change
GOING CONCERN GONE CONCERN
CFO
45%
CRO
45%
Audit
10%
CFO
35%
CRO
60%
Audit
5%
In a “gone concern RAF” functions involved modify their relevance and
processes change their priorities
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RISK CULTURE & RISK APPETITE Review of business area prioritization
Focused communication towards institutional/significant local organizations
(by top management) and customers (by branch network) have to be addressed
Loans
Deposits
Wealth management
Capital market
Services
Deposits
Loans
Capital market
Wealth management
Services
Reputational
&
Liquidity
STRESSED RISK FACTOR
In a “gone concern”
context, external
communication becomes
a priority issue because of
the potential impact both
on reputational risk and,
indirectly, on liquidity risk
DETONATOR EFFECT:
CREDIT RISK
GONE CONCERN GOING CONCERN
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RISK CULTURE & RISK APPETITE Review of risk prioritization
Credit
Liquidity
Capital
Adequacy
Market
Operational
Business
GONE CONCERN GOING CONCERN
STRESSED RISK FACTOR
Liquidity /
Reputational
Credit /
Provisioning
Lack of
Capital
Market
Operational /
Reputational
Business
Liquidity Reputational Risk Risk
Credit Provisioning Risk Issue
Capital Lack of Adequacy Capital
Focus on provisioning and loan coverage adequacy
Focus on commercial actions to protect deposits and manage liquidity risk
Focus on RWA fine tuning to minimize lack of capital
Operational Reputational Risk Risk
Focus on recover of possible operational risk factor related to reputational risk
DETONATOR EFFECT:
CREDIT RISK
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CREDIT EVOLUTION
LIQUIDITY EVOLUTION
INT
O «
GO
NE
CO
NC
ER
N»
RISK CULTURE & RISK APPETITE Recent operational evolution of Banca Marche: liquidity & credit evolution
Expiry
of first
potential
buyer
funding
April
2015
May
2015
Bond &
ABS market
placement
to write-off
former potential
buyer funding
August
2014
From Banca
d’Italia funding
to potential
buyer funding
From ECB to
Banca d’Italia
funding
September
2013
New
Loan
Policy
March
2014
PD/LGD
Model
Review
July
2014
July
2015
Credit
process
restructuring
Relevant
change in
Credit Policy
(Coverage and
Provisioning)
December
2013
TURNAROUND
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AGENDA
RISK CULTURE & RISK APPETITE
FROM GOING TO GONE CONCERN
OPERATIONAL RECOVERY
CONCLUSIONS
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FROM GOING TO GONE CONCERN Processes prioritization in a context of «going concern»
The new EU Banking Regulation introduced new tasks in terms of credit risk management,
with high impact in terms of organization, especially in IT and Human Resources.
This led to the structuring of different related processes …
… a "gone concern" bank requires a strong review of the priorities for many
single processes in consideration of the strategic evolution expected
Hot topic
Low time criticality
High time criticality
Source: Bain Analysis
BAIN Financial Services Brief
January 2015
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FROM GOING TO GONE CONCERN New processes prioritization
“Gone concern“ context and new processes prioritization …
Some solutions have been taken in order to achieve a cost/benefit optimization HUMAN RESOURCES
• Introduction of a specific «Solidarity Fund», which allowed early retirement to about 300 staff (10% resources)
• Staff transfer from Head Office to Branches Network
ICT
• Application Management, external management of ICT applications
•Recovery e resolution plan
•Bail-in tools
•LCR /NSFR
Higher Importance
•Leverage Ratio
• ICAAP
•AQR stress test
•SREP
•Remuneration
•…
Lower Importance
Others Processes
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RECOVERY OPTIONS
FROM GOING TO GONE CONCERN Recovery options
STAND ALONE
Maintenance / consolidation of the ICT
investments for strategic projects
Consolidation of the investments and
HR optimization in the strategic areas • IRB / AMA projects
• Reporting and information
Medium term revision of the strategy
on core business processes (no further
development on non core business),
focusing on what we already know how
to do, trying to do it better!
ACQUISITION / AGGREGATION
Reduction of ICT investments on strategic projects
Reduction / optimization of HR in strategic
development areas
• IRB / AMA projects
• Updates M/L term stress test
De-prioritization of
• ICAAP / ILAAP
• RAF
• Policy
Focus on control activities
Strong optimization (ICT / HR / Strategy)
on core business operating costs
Early Internal Assessment supported by the CRO
Supports and facilitates the identification of business to focus on (core and non core)
Evaluates internal interconnections between risks, business and activities
Supports and facilitates the identification of critical functions/departments processes
MOST LIKELY SCENARIO
(ITALIAN MARKET )
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AGENDA
RISK CULTURE & RISK APPETITE
FROM GOING TO GONE CONCERN
OPERATIONAL RECOVERY
CONCLUSIONS
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OPERATIONAL RECOVERY Exit strategy: CRO topics
In the most likely scenario the CRO supported the following purposes
Strategic Analysis
& Controls
Control the flow of information and manage the relationships with the Supervisor
Creation of a centralized coordination unit for 2nd level permanent controls
Capital Management - RWA fine tuning
Risk Analysis
Revision and extension of quantitative risk management models
Management of flow of information (hide critical ones!) between functions
Adoption of a single rulebook and valuation metrics
Strengthen integrated planning and risk management operational framework
Governance
Bank as a strongly integrated entity, with strong cooperation between functions
and clearly-defined roles and responsibilities
Identify managers not in tune with the most likely scenario because risk of failure
strongly increase in a gone concern context
ICT / Processes
Enhance processes and information management to support the ongoing strategic
decision process, the proactive management of the budget and the risk prevention
Unique business process mapping
In a “gone concern” context, in order to support the increase of the bank intangible asset
value, the CRO has to improve some strategic functions, consolidating a more correct “risk
culture” and aligning with the best practices
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UNDER CRO DIRECT CONTROL
CRO INVOLVED
OPERATIONAL RECOVERY Exit strategy: CRO relevant projects
MACRO AREAS OF EVOLUTION
Internal
Control System
Permanent
Controls
RAF &
Internal Policies
Credit
Monitoring
AML
Data
Quality
IRB Validation
Process
AMA Validation
Process
Liquidity
Compliance
Under a new managerial approach, in order to achieve this goal, given all the relevant ICT
constraints and the limited use of specialized consulting activities, the use of specialized
professional training has been very helpful
Optimization of
control processes
Review
CRO ICT
NEXT FOCUS
Process &
ICT Revision
Regulatory
Compliance
Medium Term
Strategic Objectives Governance
CAPTION
Strategic Analysis
& Controls
Risk Analysis
Governance
ICT / Processes
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The "gone concern" context led to a significant review of control processes and measuring risk
tools, in order to optimize and standardize as much as possible highly FTE absorbing activities
OPERATIONAL RECOVERY Process & ICT revision: optimization control processes
Reporting produced with engineered processes
• Identification, development and optimization of databases reporting (timing, certification,
single platform company)
• Development of automatic reporting, for Network and Head Office
Internal rating system and credit processes review
Maintenance of the rating system in IRB framework
• Integrating information for development of leasing models of PD and LGD
• Revision of segmentation of the Group risk
New Process/Risk /Control Map integrating the 2nd level control function areas
Integration of control processes across different control functions
• Credit monitoring of 2nd level and AML
• Local Permanent Controls Staff and 2nd level controls
Process engineering control of 2nd level in a GRC application for
• Reduction FTE involved in control activities
• Planning interventions
• Work-flow certification
AREAS PROCESS & ICT REVISION ACTIVITIES
INFORMATION
ARCHITECTURE
CONTROL
PROCESSES
NEW RISK
METRICS
PROCESSES
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In pursuit of greater integration, mechanisms for coordination between the control functions
have been set up in terms of taxonomy of processes, risk map, methodologies used and the
flows of information
OPERATIONAL RECOVERY Regulatory Compliance: Internal Control System
RISK AND
PERFORMANCE
INTERNAL
CONTROL SYSTEM
GOVERNANCE
ORGANIZATION
& COORDINATION
OF CONTROL
FUNCTION
INVESTMENT
IN ICT
AREAS OBJECTIVES
Logical connection within the control model between • Capital adequacy (ICAAP)
• Performance control (focus in pricing model)
• Liquidity control
Creating single Repository with rules and responsibilities of each organ /
Supervisory Commission / management / supervisory control model
Centralized management of follow-up on the control system
Organizational collocation and hierarchical reporting
Areas of responsibility
Centralization / decentralization
Dimensions and synergies of scale (units specialized tests)
Control methodologies
Integration evaluation models
Datawarehouse for remote controls
Single Repository for processes, risks - events, controls
Single Control work flow
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CONTROLS
OPERATIONAL RECOVERY Regulatory Compliance: credit monitoring (1/2)
PROJECTS
1. New Credit Department
organization for impaired
loans management with a
focus on the NPL portfolio
2. Outsourcing
of small ticket
impaired loans
collection
3. New Credit Department
organization to support
the management of
impaired loans
6. Rationalization
and focus on the
Corporate loans
management
4. Review of the
performing loans
management
processes
5. Review of grid of delegated
powers and rationalization
of the branches network
operational model
OBJECTIVES
Controls of single
positions delegated
to Committees and
Board of Directors
(ex ante control)
Quantitative
controls on
loan portfolio
(ex post control)
Local permanent
controls on loan
management and
credit strategies
compliance
(ex post control)
Strengthen
the recovery
processes of non
performing loans
+ Improve the
high risk and
the past due
credit quality
+ Optimize the
processes of lending
and the loan portfolio
management
The monitoring conducted by the CRO focuses on 2nd level controls which tend to evaluate
the proper implementation of policies and regulations.
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1. New Credit Department organization for impaired loans management with a focus on the NPL portfolio
Upgrade of the Debt Collecting Office
Create a support office to liaise with the loans collecting agent
Start the process in the continuous collection of outdoor practices with reduced exposure
Review management processes for NPL
Establishment, within the Credit Department, of a dedicated Office
Corporate Relationship Officer to support General Manager with high standing customers
Software to support the activity of corporate specialized management
6. Rationalization and
focus on the Corporate
loans management
Grid of delegated powers to optimize workloads based on the risk taken
Decentralize the Commercial Network (Regional Office) for the Retail and Small Business segment
Acquisition of software to support the network in credit decisions
New applications and / or currency until the draft revision of the loan application
Review of internal structure to support Regional Credit Areas
5. Review of grid of
delegated powers and
rationalization of the
branches network
operational model
Update Early Warning process: statistical model and operating framework review
Review of credit status and of the Credit Division set up according to new EBA Regulation
Review of the Loan Policy
3. New Credit Department
organization to support
the management of
impaired loans
Reduction of number of interventions on the performing and / or abnormal files with the support of
specialists in Regional Credit Offices
Assign tasks to manage files in pre-litigation and administrative management of impaired positions /
past due outsourced (external collection)
Handling of problem loans at the Head Office, where specializations is greater
4. Review of the
performing loans
management processes
OPERATIONAL RECOVERY Regulatory Compliance: credit monitoring (2/2)
Start the process of external collection practices with reduced exposure
Define the rules of selection and handling of files to be outsourced
Definition of policies / regulations to activate the outside credit collection in continuous for new loans
2. Outsourcing of small
ticket impaired loans
collection
GUIDELINES PROJECTS
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AGENDA
RISK CULTURE & RISK APPETITE
FROM GOING TO GONE CONCERN
OPERATIONAL RECOVERY
CONCLUSIONS
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CONCLUSIONS Nearly gone concern operating environment
The conditions of a nearly gone concern operating environment typically are the
presence of inadequate processes and operational behaviours not correctly
oriented… no sound practices!!
The CRO role in such an operating environment is very critical
CRO must have a good reputation and be generally acknowledged within the
organization through a significant role
during the transition between going and gone concern CRO should
• be totally unrelated to the dynamics that led to the crisis and not be conditionable by
"environmental factors“… it's easier if CRO comes from outside!!
• quickly identify the risk factors that, before the crisis, were not fully emerged and quickly
provide a quantification even accepting simplifications… timeliness is much more important
than absolute accuracy!!
• identify managers who can be part of the solution, preferably if coming from outside, therefore
not related to the path that led to the crisis
• establish a relationship of trust with the new Board of Directors and/or Top Management
in charge, in order to make himself available for the turnaround required
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CONCLUSIONS Gone concern operating environment
The prerequisites of sound practices in a gone concern operating environment are
the removal both of inadequate processes and of operational behaviours not
correctly oriented…
… the CRO in such an operating environment must have
a broad overview to better understand the interconnected problems
a strong commitment on removing the critical internal factors, in order to
• identify the functional dynamics not operating properly
• identify the relational dynamics to understand the “critical” relationships existing within the
bank management
o “critical” does not mean that within the top management must exist one single thought
o “critical” means that the mechanism based on dialectical contraposition does not work properly
• provide possible solutions to problems according to a holistic view and, above all, don’t
waste time in waiting for someone else to solve all the problems
• increase the intangible asset value of the bank through a strong consolidation of a correct
“risk culture” and a path of gradual and sustainable alignment with the best practices
• not let people operate under a constant uncertainty framework!!
