Enterprise Risk Management in Asean

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Enterprise Risk Management at Asian Banks:
FROM CHALLENGES TO STRATEGIES

An Executive White Paper by James Lam
Senior Advisor, Asia Risk Management Institute (ARMI)

January 2007

A Letter from James Lam
Dear Colleague, “It was the best of times, it was the worst of times,” the opening sentence of A Tale of Two Cities, by Charles Dickens, perhaps best captures the current state of risk management at Asian banks. Supported by strong capital positions, Asian banks are well poised to play a vital role in supporting the rapid economic growth across Asia. Moreover, deregulation and consolidation provide Asian banks with unprecedented business and growth opportunities. However, banks cannot function effectively without sound risk management. Most of the chief risk officers (CROs) who participated in this research study expressed significant concerns about their readiness in meeting new business and regulatory requirements. In general, they envisaged that it will take at least 5-10 years for their banks to catch up to current international standards in risk management. In an effort to identify the unique challenges faced by Asian banks, as well as develop practical recommendations, the Asian Risk Management Institute (ARMI) has sponsored this inaugural research project. The objective of this research project is to go beyond descriptive in terms of specific challenges and issues, but also be prescriptive in terms of recommended strategies and actions. On a personal note, it has been a privilege for me to lead this research effort. Since I was born in China, and spent my early childhood in Macao, Hong Kong, and Singapore, I feel a strong sense of affinity to Asia. As a risk specialist for over twenty years, the opportunity to develop an assessment of risk management practices at Asian banks has been a valuable experience for me. On behalf of ARMI, I would like to thank Atos Origin and Economic Development Board (EDB) of Singapore for their support. I would also like to thank the individual members of the ARMI Research Team – Mr. Lim Eng Hong, Ms. Oh Gim Siew, Mr. James Kong, Mr. Julian Cornelius, and Ms. Abha Uppal – for their considerable contributions. Asian banks face tremendous challenges with regard to risk management. Their decisions and actions over the next several years will have a significant impact on risk management effectiveness, not only for individual banks but also the overall banking sector. We hope that the research and recommendations contained in this white paper will represent a call to action, as well as the basis for an ongoing dialogue with you in the years ahead.

Best regards,

—————————————— Senior Advisor, ARMI

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Content Page

Introduction Asian Banking Context Executive Summary of Key Findings and Recommendations Research Methodology The Business Case for Enterprise Risk Management Key Findings and Recommendations A Call to Action Summary Appendix A: Economic and Financial Uncertainties in Asia Appendix B: The ERM Maturity Model Appendix C: Integration of Key Performance Indicators and Key Risk Indicators References About AMRI

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Introduction

Bank executives and board members in Asia, with lessons learned from the 1997 Asian Crisis still fresh on their minds, are now facing unprecedented business opportunities and risk management challenges. On the one hand, economic growth rates are strong, foreign direct investments are high, and future business prospects are indeed bright. On the other hand, Asian banks operate in more volatile financial markets, and they are undergoing significant structural changes with respect to deregulation, privatisation, and consolidation. Moreover, Asian banks face complex organisational and technical challenges in meeting new regulatory requirements from their central banks and the Basel II framework.

Asian Banking Context

Risk management at Asian banks should be discussed in the...
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