Standard Bank Sets Up New Risk Oversight Committee

STANDARD Bank of South Africa is creating a risk management committee to look at risk across all of the bank's operations, says Ian Gilbert, senior general manager of risk management.

In a related move, Standard has enhanced its credit risk management by bringing in new systems at its London office as the first step towards global consolidation of the bank's credit monitoring.

Gilbert says Standard's new risk committee will reinforce his current role by formally examining risk reporting across the bank's various departments.

Derek Cooper, a non-executive director of Standard, will head the committee. Gilbert says non-executive board members are ideally suited to monitoring bank-wide risk. "This is done for reasons of good governance," he says. "It brings in outside minds and it makes it harder for us to cover something up."

Gilbert says Standard's new risk committee will meet two or three times a year to thoroughly examine bank-wide risks. "We are escalating the risk awareness of our organization," he says.

The committee won't be involved with day-to-day enforcement of risk regulations, however. "Its function is not to sanction, but to be comfortable with the risks that the bank takes," says Gilbert.

Under Standard's current operational structure, Gilbert is charged with examining risk functions from a bank-wide perspective, overseeing everything from market risk to systems issues.

If Gilbert considers that one of the bank's divisions is operating in a way that leaves it too exposed to adverse market movements, systems failures, or any other identifiable form of risk, he can "rattle its cage", he says.

"I report to the chief executive -- if anything looks really worrying I can go straight to him," says Gilbert. Mike Vosloo is chief executive officer for the entire Standard Banking group.

Additional safeguard

Standard's new risk committee will be added to the existing risk structures at the bank, which include a group asset/liability management committee that oversees liquidity, interest rate margins and market risk positions.

The treasury division of the bank is responsible for implementing strategies determined by Standard's asset/liability management committee.

Credit risks are controlled by a separate credit committee, while operational risk is managed through separate structures within each business unit, says Gilbert.

Standard also maintains a risk monitoring framework in London, headed up by David Pitts. Pitts also oversees risk in New York and Hong Kong.

He answers to Pieter Prinsloo, managing director of Standard Bank London. The new risk committee in Johannesburg will also back up Pitts' efforts.

The bank is now working to further consolidate its credit risk management functions at its head office, says Gilbert.

Richard James, manager for treasury credit risk in Johannesburg, says part of the impetus for the new risk procedures came from Standard's London centre.

The London office, like most UK banks, is under pressure from the Bank of England to revamp its control procedures, especially in terms of credit risk.

This pressure was felt back in Johannesburg and was an important motivating factor for the decision to step up control procedures across the entire group, says James.

Consolidating credit risk analysis in Johannesburg required a new risk monitoring system. This resulted in the installation of CMG's Cobra Limits system, which will pool together global counterparty exposure information.

James says Standard previously measured its credit risk on a desk-by-desk basis with a series of in-house developed systems. "There was no real focus," he adds.

Counterparty risks

Gilbert says the key issue in credit risk management is the danger that multiple bank locations could be too exposed to a single counterparty.

"If a particular counterparty is going to blow up, we need to be able to know which of our locations are exposed," he says.

"We could have a number of areas dealing with the same counterparty. If our limits are centralized in Johannesburg, we can tell our total exposure at close of business day," he adds.

Standard started looking for a system to enable it to view its credit risks on a global basis some 18 months ago.

The bank looked at systems from several vendors, including the Ricos system developed by Management Data, a subsidiary of Austria's Creditanstalt.

However, James says Ricos was ruled out because it ran on mainframes. Management Data is currently developing a Unix version of the system.

James also talked to several market risk systems vendors, but he says these vendors don't offer truly dedicated and effective credit risk systems. "There was a lot of vapourware," he says.

Eventually, the bank decided on Cobra Limits from CMG. The system is Unix-based with an Oracle database and a Microsoft Windows NT front end.

London pilot

Standard is now testing Cobra Limits in its London office, with plans to go live this September. If all goes well, the system will be rolled out to Johannesburg by the end of this year.

Separately, the bank recently hired Paul Smith as director of risk management for the bank's treasury operations. Smith, formerly a partner with KPMG in Johannesburg, will answer to Jacko Maree, a managing director of Standard.

Earlier this year, Standard announced a separate initiative to beef up its market risk management function.

The bank is building a treasury and capital markets risk management data warehouse using software from Infinity Financial Technology (RMO, February 10). Standard also uses Algorithmics' Risk-watch for market risk analysis.