CREDIT RISK MANAGEMENT A GLOBAL FUND MANAGER'S PERSPETIVE

Transcription

1 CREDIT RISK MANAGEMENT A GLOBAL FUND MANAGER'S PERSPETIVE Moody's Analytics Risk Practitioner Conference October 3 rd, 2011 Philippe Tremblay Senior director, Credit and liquidity risk management 1

2 Caisse Figures and investments activities Risk management framework Credit risk management framework Main challenges Next steps 2

3 SECTION 01 CAISSE FIGURES AND INVESTMENT ACTIVITIES 3

4 SECTION 01 Mission "The mission of the Caisse is to receive moneys on deposit as provided by law and manage them with a view to achieving optimal return within the framework of depositors investment policies while at the same time contributing to Québec s economic development." 4

5 SECTION 01 More than 45 years of investment Founded in July 1965 Act of Québec s National Assembly Initial mandate: to manage the assets of the Québec Pension Plan (RRQ) Mandate widened over the years to include the funds deposited by other Québec public and private sector pension and insurance plans As at December 31, 2010: 25 depositors net assets of $151.7B 5

6 SECTION 01 Main Depositors Québec public and private sector pension and insurance plans As at December 31, 2010 Government and Public Employees Retirement Plan (RREGOP) B$ % Pension Plan Amortization Fund (FARR) Québec Pension Plan Fund Supplemental Pension Plan for Employees of the Québec Construction Industry Health and Work Safety Fund Québec Automobile Insurance Fund Pension Plan for Management (RRPE) Other

7 SECTION 01 Organizational Structure As at December 31, 2010 CHAIRMAN BOARD OF DIRECTORS Human Resources Committee Governance and Ethics Committee Audit Committee Risk Management Committee Executive Committee PRESIDENT AND CHIEF EXECUTIVE OFFICER Internal Audit Depositors and Strategic Initiatives Investment Management Private Equity Real Estate Risk Management Fixed Income Financial Management Equity Markets Operations and Information Technology Management Talent Management and Organizational Development Overlay Strategies Economic Analysis and Asset Allocation Strategies Legal Affairs and Secretariat Public Affairs 7

8 SECTION 01 Human Resources The Caisse relies on talented employees As at December 31, 2010 The Caisse has 741 highly qualified employees 77.2% have university degrees and 35.8% have a postgraduate degree Dual competencies are highly sought after (finance and IT) Many employees hold professional designations: CFA, CA, CGA, CMA, FRM The Real Estate sector has a total of 1,932 employees The Caisse endorses the principles of employment equity and aims for a level of diversity that is representative of the various groups that make up our society. 8

9 SECTION 01 The Caisse vis-à-vis its peers A major fund manager One of the largest institutional fund managers in Canada and North America One of the world s 10 largest real estate asset managers Leading Canadian private equity investor Shareholder in more than 4,000 companies globally One of the few North American entities with the highest credit ratings: AAA from DBRS and S&P, and Aaa from Moody's 9

10 SECTION 01 The Caisse s assets Changes since 1966 In billions of dollars as at December 31 10

11 SECTION 01 Breakdown of assets by asset class As a percentage as at December 31, 2010 Fixed Income 36.9 Inflation-Sensitive Investments 14.5 Equity 47.7 Hedge Funds 2.2 Asset Allocation 0.4 ABTN (1.7) 11

12 SECTION 01 Geographic breakdown of depositors total assets As a percentage as at December 31, 2010 Canada 63.9 United States 16.6 Euro Area 5.9 United Kingdom 4.0 Japan 1.8 Emerging Markets 4.7 Other

13 SECTION 02 RISK MANAGEMENT FRAMEWORK 13

14 SECTION 02 Integrated risk management policy Our philosophy The integrated risk management policy serves to: Promote a risk management culture based on rigorous practices that ensure the Caisse can fulfill its mission for its depositors This policy also serves to: Define risk management governance at the Caisse Set the level of risk acceptable to prevent excessive losses Align this level of risk with value-added objectives Allocate risk effectively 14

15 SECTION 02 Integrated risk management policy Risk model Risk Management group s objectives: Manage business risk Manage financial risk Manage operational risk Risk Management group s role : Ensure a balanced and transparent risk-return relation by performing a second level control. This control is realised by providing effective tools for risk calculation, reporting and management, by supporting the development of profitable invesment strategies as well as by promoting a healthy risk culture.

16 SECTION 02 Risk management process Decide the acceptable level of risk and communicate it through the organization Mitigate, if necessary, to remain in the acceptable risk tolerance by concerted action plans 3. Action 3. Agir 2. Assessment 2. Évaluer 1. Identification Anticipate risks in a disciplined process Prioritize the financial, operational and business risks for Caisse Mesure, report and manage risks with effective tools Analyze the risks in a targeted manner by quantitative and qualitative methods 16

17 SECTION 03 CREDIT RISK MANAGEMENT FRAMEWORK 17

18 SECTION 03 Credit risk management framework 1. Identification News watch Global key risk indicators Relationships Portfolio managers Business unit risk management experts Risk community 2. Assessment 18

19 SECTION 03 Credit risk management framework 2. Assessment Assessment tools Credit ratings Concentration Credit VaR Stress-testing What-if analysis Reporting tools Team analysis 2. Assessment 19

20 SECTION 03 Credit risk management framework 3. Action Recommandations following team analysis Trainings Risk limits and constraints Credit ratings Concentration Type of products Credit VaR 2. Assessment 20

21 SECTION 03 Credit Value at risk approach implementation Reasons explaining credit VaR implementation Size and complexity of the portfolio Improvement of risk measurement and management in portfolio context Vs single-name measurement and management approaches Better credit risk optimization in a portfolio context Limited capacity to run scenario analysis Change in the role of risk team Importance of regulation for Caisse 21

22 SECTION 04 MAIN CHALLENGES 22

23 SECTION 04 Relationship with stakeholders Challenge Ensure that all project stakeholders are supportive of the project and in line with the targets Caisse recommandations Ensure continuous updates on the project to stakeholders and high management Involve portfolio managers in the methodology choices Train the stakeholders Adapt the reporting to the stakeholders Produce value-added analysis Choose a supplier demonstrating its ability to support your targets and its desire to do so Be prepared to invest the necessary time to explain your ideas/concerns to the supplier with the objective of obtaining a better quality tool 23

24 SECTION 04 Project planning Challenge Plan continous delivery that meets the expectations from management Caisse recommandations Evaluate the strenghts and weaknesses of the team/organization Plan multi-steps delivery approach From simple to complicated assets From acceptable to best in class methodologies From manual to automatic production Include the business process in the project planning 24

25 SECTION 04 Methodology Challenge Estimate correctly the level of credit risk and obtain a coherent and comparable measure of credit risk through out the portfolios Caisse recommandations From acceptable to best in class methodologies Compare the results from different approaches Ratings : "Point in time" vs "Through the cycle" ratings Credit transition : GCorr vs Historical transition matrices vs default/no default Loss given default : Constant vs Seniority vs Sector Work closely with the supplier Private and sovereign instruments Number of simulations 25

26 SECTION 04 IT and infrastructure Challenge Develop an IT system and processes to rapidly produce reliable results while maintening flexibility Caisse recommandations Define the role and responsabilities of IT team Obtain the official support from IT team Provide clear specifications of business needs to IT team Data needs, business transformation rules, controls, reporting needs, reporting flexibility, process time, Support IT team during developments and tests Image 1. Sources 2. Systèmes sources 3. Data hub 4. Credit risk solution 5. Reporting 6. User 26

27 SECTION 04 Data Challenge Be assured of data quality in order to not compromise the results quality Caisse recommandations Organize the data information Understand the portfolios Understand the data needed by the software Work in partnership with portfolio manager and the vendor Integrate the data as part of the project planning Integrate data for all risk systems in a common database to ensure data quality and consistency through out the team Adapt data governance 27

28 SECTION 05 NEXT STEPS 28

29 SECTION 05 Next steps Upgrade the business process Finalize the daily production automatisation of Credit VaR Organize data governance for risk team Increase the asset coverage CDO Instrument Construction loans Continously improve methodologies 29

30 THANK YOU

31 CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC 31