Risk Management at ANZ

Transcription

1 Introduction ANZ recognises the importance of effective risk management to its business success. Management is committed to achieving strong control, and a distinctive risk management capability that enables ANZ Divisions and business units to meet their performance objectives. ANZ approaches risk through managing the various elements of the system as a whole rather than viewing them as independent and unrelated parts. The Risk function is independent of the business with clear delegations from the Board and operates within a comprehensive framework comprising: The Board, providing leadership, setting risk appetite/strategy and monitoring progress. A strong framework for development and maintenance of Group-wide risk management policies, procedures and systems, overseen by an independent team of risk professionals. The use of sophisticated risk tools, applications and processes to execute the global risk management strategy across the Group. Business Unit level accountability, as the "first line of defence", and for the management of risks in alignment with ANZ's strategy. Independent oversight to ensure business unit compliance with policies, regulations and laws, and to provide regular risk evaluation and reporting. Organisational Control & Board Governance ANZ s Board has ultimate responsibility for risk management. In discharging its governance responsibility for overall risk management and control, the Board has established two key s, the Risk (RC) and the Audit. The Audit assists the Board in overseeing internal audit and the adequacy of ANZ s accounting policies and financial reporting. The Risk assists the Board in fulfilling its global responsibilities relating to the oversight of ANZ s risk management strategies, policies and processes that have the potential to impact significantly on earnings performance, reputation and capital protection, and to approve significant credit transactions and other matters beyond the approval discretion of executive management. The Group Asset and Liability (GALCO), Credit and Trading Risk (CTC) and Operational Risk Executive (OREC) support the Risk and are responsible for the co-ordination of risk matters for each of the areas of risk management. ANZ Board Audit Review the risk control framework and compliance with polices and regulations Key: (C) = Chairman (JC) = Joint Chairman Risk Management Risk (RMC) Oversees policy, strategy / processes Authorises Group s Limits framework Authorises limit approvals of the CTC Four independent directors, CEO, CFO, CRO, General Counsel Risk RMC meets at meets least four at least times four annually times annually Group Asset & Liability (GALCO) Non-traded interest rate risk, including the investment of capital Liquidity & funding Balance sheet structure Structural foreign exchange exposures, including capital and revenues Funds transfer pricing Policy, control, and compliance activities for all balance sheet risks and operations. CEO, CFO(C), CRO, Group Treasurer, Head of Market Risk, Group MD IFS, Institutional, Chief Economist, Chief Economist, COO COO GALCO meets at quarterly least monthly Credit & Trading Risk (CTC) (CTC) Policy Major lending decision Asset writing strategies Portfolio Traded risk and Non-Traded risk Controversial and/or environmentally sensitive issues CRO, CEO, CFO(C), CFO, Senior CRO, Managing GM GSD, Director, MD's of IFS, CEO, IB, Chief CF&A, Wholesale Corporate Credit and Officer, SME, GM Chief Wholesale Retail Credit Risk Officer, at least two Divisional MDs, MD Consumer Finance CTC meets weekly Operational Risk Executive (OREC) Operational Risk Compliance Information Security CFO, COO, CRO, MD OTSS, Group GM People Capital, GM Group Audit, and at least 5 selected members from Group Heads OREC meets ten times annually

2 The members, meetings and focus of each are shown below: Board Board of Directors Members 7 Directors + CEO; Meetings At least 8 times/year Risk Focus Leadership; overseeing risk appetite and strategy; ensuring a robust risk and compliance culture Board s Risk of the Board Members 4 Directors + Bank Board Chairman (a member of the ANZ Management Board must be in attendance) Meetings At least 4 times/year and more frequently if deemed necessary. Focus The review of risk in all aspects of the business. Overseeing, monitoring and reviewing ANZ s risk management principles and policies, strategies, processes and controls. The Risk may approve credit transactions and other matters beyond the approval discretion of executive management Audit of the Board Members 3 Directors (including one financial expert) + Bank Board Chairman Meetings At least 6 times/year Focus Oversight of ANZ s financial reporting policies and controls, integrity of ANZ s financial statements, the work of Group (internal) Audit, the Audit s of the subsidiary companies, prudential returns and compliance with regulatory requirements. Senior Executives Group Asset and Liability Meetings Quarterly Focus Policy, regulatory capital, balance sheet structure, liquidity and funding, foreign exchange, non-traded market risk, funds transfer pricing and portfolio. Credit & Trading Risk Meetings Weekly Focus Approval of credit and market risk control frameworks, including portfolio review, credit transaction approval within its discretion, review of controversial and/or environmentally sensitive clients and transactions, policy approval, and model performance oversight Operational Risk Executive Meeting 10 times annually Focus - Approval and monitoring of the effectiveness of Operational Risk and Compliance policies and frameworks; review of Operational Risk and Compliance incidents and monitoring of new and emerging risks.

3 The various risks inherent in ANZ s operations may be broadly grouped together under the following major categories: Credit Risk ANZ has an overall lending objective of sound profitable growth and may be further expressed as: Strong risk control and reporting, resulting in no surprises for management; and A distinctive risk management capability, enabling ANZ business units to meet their performance objectives. To support this objective, a credit risk management framework is in place which provides a structured and disciplined process for managing credit risk, i.e. the risk of financial loss resulting from the failure of ANZ s customers to honour or perform fully the terms of a loan or contract. The intention of the credit risk management framework is to institutionalise the concept of sound risk management as a fundamental platform for all lending, whilst recognising that there will always be an element of risk attached to a lending portfolio which staff must be properly equipped to identify, assess and manage. A key extension of this is that returns should be adequate to compensate for the risk. The framework is top down, being defined by ANZ s Vision and Values and Credit Principles and Policies. The effectiveness of the credit risk management framework is validated through compliance and monitoring processes. These, together with portfolio direction, define and guide the credit process, organisation and staff. Market Risk ANZ has a detailed market risk management and control framework, to support trading activities, which incorporates an independent risk measurement approach to quantify the magnitude of market risk within the trading books. This approach, along with related analysis, identifies the range of possible outcomes that can be expected over a given period of time, and establishes the relative likelihood of those outcomes. Market risk also includes the risk that ANZ will incur increased interest expense arising from funding requirements during periods of poor market liquidity (balance sheet or non-traded market risk). ANZ has a separate risk management and control framework for such risks, which is built around a Board-approved policy and limit framework. Within overall strategies and policies, the control of market risk at the Group level is the joint responsibility of business units and Risk Management. Within ANZ, three areas collectively manage all market risk exposures: Institutional Markets; Corporate Asset Portfolio Management; Group Treasury. Operational Risk Operational Risk management is an integral element of ANZ s overall corporate governance and risk management structure. In managing operational risk, ANZ believes that it is important to have a clear understanding of the nature of this type of risk. ANZ defines operational risk as: The risks arising from day-to-day operational activities which may result in direct or indirect loss. These losses may result from failure to comply with policies, procedures,

4 laws and regulations, from fraud or forgery, from a breakdown in the availability or integrity of services, systems and information, or damage to ANZ s reputation. Some operational risks can be insured and where cost effective, insurance cover is arranged. Many operational risks are not insurable. ANZ considers that the objective of operational risk management is to ensure that risks are identified, assessed, measured, managed and monitored in a structured environment. ANZ does not expect to eliminate all risks, but aims to minimise exposure based on sound risk/reward analysis in the context of an international financial institution. Group Compliance ANZ's policy is to conduct its business in accordance with the laws of the countries in which it operates, relevant regulations and codes of conduct, and ANZ s internal policies and standards. The overarching aim of Group Compliance is to avoid the business and reputational risks that might arise due to non-compliance with any of these laws, codes and policies. ANZ s Compliance Framework, which applies to all business areas, aims to achieve and embed a compliance culture at ANZ that is consistent with the Australian Standard on Compliance Programmes (AS 3806), which describes a Culture of Compliance as the promotion of a positive attitude to compliance within the organisation. Key principles of the Compliance Framework are to foster an integrated approach where staff are responsible and accountable for compliance, either within their job role, or within their area of influence, and to reward correct compliancerelated behaviour. Controversial and/or Environmentally Sensitive Issues Controversial and/or environmentally sensitive issues associated with a client or transaction can potentially have an impact on ANZ beyond the approving business unit. ANZ has policies and processes to ensure that that these issues are well managed and that the broader implications to ANZ are dealt with as a part of decision-making processes. A Controversial Issues Policy has recently been approved which ensures that business units identify and, where appropriate, escalate credit approvals to ANZ s senior executives (CTC) to ensure that the broader implications of the issues are taken into account. A mechanism is also being established to enable controversial and/or environmentally sensitive issues that arise from the business activities of existing clients to be elevated to CTC for discussion and resolution. Other Risks There are a number of other risks, which are not classified as Market, Credit, Operational or Compliance Risk, which need to be managed effectively and for which ANZ holds economic capital. These include, but are not limited to, items such as investment risk and fixed asset risk. Best practice risk management involves an independent group providing input into key investment decisions, ensuring that all the risks are transparently reflected and properly understood at key decision levels. Business Risk is the risk that value will be lost through the selection of specific business directions or through changes to the Group s overall business model. ANZ has portfolio risk assessment and management teams within Risk Management to monitor the changing risk profile of the group, and

5 to provide independent risk input into investment activity and other key portfolio decisions. This ensures that implications for ANZ s risk profile are identified early, along with assessment of available risk mitigants for all risk types. Where risks cannot be entirely eliminated, confirmation is required that the residual risks fit within ANZ s risk appetite, and where the decisions or residual risks are significant, these risk assessments are submitted to the Board s Risk and/or its subcommittees for their consideration. Risk Management oversight responsibilities for "other risks" are outsourced to other areas of ANZ with more appropriate expertise. Some examples include, but are not limited to: Key person risk People Capital Tax risk Group Tax Health and Safety risk People Capital Most of these other risks would be reported at the Operational Risk Executive (OREC) forum. Risk Policy Architecture ANZ has a clearly defined policy framework that sets out how all material risk activities are managed across ANZ. ANZ Policy is not stationary; it evolves constantly in response to changes in strategy and market conditions. The policy process across the group is consistent for all types of risk. It is organised into levels to reflect applicability to the business units, with each level of policy prescribing the roles and responsibilities of owner and custodian. At the highest level, Risk - approved risk principles define the scope and overarching requirements of ANZ s approach to risk. Executive committees translate the principles into practice by approving risk frameworks and group-level policies that provide guidance to business divisions. Within this context and aligned to the risk frameworks, business divisions develop policy to address risk management within their specific areas of activity. Risk operating procedures support divisional policy at the business unit level. Models ANZ has a sophisticated risk modelling capability. Risk models are employed to quantify economic risk and allocate economic capital - the amount of capital needed to support the Group s risk taking activities. Credit risk capital allocation systems are typically based on institutional estimates of credit loss distribution. Economic capital that is allocated to a particular activity reflects that activity s marginal risk contribution to the portfolio, taking into account diversification. Risk models are used to measure ANZ s risk-adjusted profitability and ensure efficient usage of shareholder funds. The setting of limits and reporting of portfolio credit quality also uses risk models to manage risk portfolios. Rating systems and rating tools are being enhanced in line with Basel II accreditation, to enable more accurate and verifiable prediction of a customer s likelihood of default, and ANZ s losses in the event of default. All material risk models used at ANZ are either developed by business units, with independent assessment and authorisation for use by Risk Management, or developed by Risk Management, with independent reviews commissioned as appropriate.