UMCA Power Presentations

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Risk Management at National Bank of Canada

• Presented by
• Alexander Marini
• For PRMIA Montreal Career Day
• October 2, 2008
• Concordia University

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Disclaimer

• I take full responsibility of the content in this
  presentation. The views and ideas presented here
  are my own and not necessarily those of National
  Bank of Canada.

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Agenda

• What is the challenge of Risk Management?
• How is risk management organised at National Bank
  of Canada?
  
• What are the challenges of each risk group?
• A short history of market risk management
  evolution.
  
• Who are our clients?
• What skills are we looking for?
• Are you ready for the challenge?

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What is the challenge ofRisk Management?

• To create and maintain an infrastructure that
  facilitates the understanding and quantification
  of the risks associated with past, present and
  future activities. (at a reasonable cost)
• The infrastructure needs to be flexible in order
  to accommodate the introduction of new products
  and evolve with changes of how we view risk.
  
• The results of the risk management process must
  be useful in business planning.
  

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How is Risk Management Organized at NBC?

• National Bank of Canada groups its risks into
  five broad categories Credit Risk, Market Risk,
  Operational Risk, Reputation Risk and Liquidity
  Risk.
• Each group plays a fundamental role in
  identifying, understanding and measuring risk (if
  possible) over various time horizons and
  confidence intervals.
• National Bank is also active in understanding and
  managing Model Risk.
  

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Credit Risk Management Challenges

• One needs to understand and quantify the credit
  worthiness of the Banks counterparties. This
  involves many variables linked to factors such as
  industry, geographic location, overall economic
  conditions etc..
• Be able to measure the exposure to our
  counterparties using a well defined methodology.
  Try to understand and quantify the impact of
  correlation between counterparty credit and the
  underlying risk factors.
• Allocate credit limits to lines of business and
  manage the exposure to counterparties in
  (hopefully) an optimal way.
  

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Market Risk Management Challenges

• One needs to understand and quantify the types of
  market risks that the Bank is exposed to such as
  Interest rates, FX rates, Equity prices,
  Commodity Prices, Credit Spreads, Volatilities
  and Correlations.
• The Bank needs to understand its exposure on an
  individual portfolio and/or business level as
  well as on an aggregate level.
  
• The Bank needs to diversify its market risks in
  an (hopefully) optimal way.
  
• Question assumptions and perform stress testing.

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Operational Risk Management Challenges

• To segregate operational risks into observable
  components.
  
• The collection of data to aid in the
  understanding of the frequency and severity of
  each operational risk type.
  
• Development of models to aggregate across the
  risk types and determine possible loss amounts.
  
• Backtesting of the model for realistic time
  horizons and confidence levels.
  

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Reputation Risk Management

• Identify issues that may expose the Bank to
  reputation risk.
  
• Determine strategies to mitigate these
  exposures.
  
• Try to understand the time horizon, probability
  and severity of events.
  

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Liquidity Risk Management

• Know your balance sheet and assess the liquidity
  of the products on a regular basis.
  
• Identify and employ useful liquidity risk
  measures (survival periods, unencumbered assets
  ) to quantify the risk.
  
• Many challenges are associated with estimating
  appropriate haircuts on assets.
  
• Diversify the source of funding (secured and
  unsecured) across products, maturity, geographic
  regions and counterparties.
  
• Quantify potential contigent liquidity.
  (drawdowns of credit lines, NBC credit rating
  downgrade)

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A Short History of Market Risk Management

• 1938 - Frederick Macaulay introduces the idea of
  duration.
  
• 1970s - Duration and DV01 are being used to
  measure interest rate risk. The idea of gaps is
  already in use.
  
• 1980s - Technology advances are helping improve
  the detail in reporting DV01s by maturity,
  currency, and Greeks reporting.
  
• Till Guldimann introduces the term Value-at-Risk
  while at J.P Morgan.
  
• 1988 - Basle Accord

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A Short History of Market Risk Management contd

• 1990s - Banks and software companies develop VaR
  systems for market risk management. Banks can use
  the internal model approach for regulatory
  capital allocation.
• 2000 and beyond Market Risk Management is
  becoming more sophisticated. Systems must cover a
  wide range of products and risk types. Time to
  bring product to market is critical. A
  convergence between Credit and Market Risk is
  occurring. (Time horizon and confidence levels
  are the distinction.)

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Our Clients

• Bank Clients
• Board of Directors and Shareholders
• All departments of the Bank (Front Office, Back
  Office, Accounting, Legal, etc)
  
• Auditors
• Regulators

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Skills that we are looking for

• Excellent team player. Ability to apply oneself
  to both team and individual projects.
  
• Enjoy serving clients.
• Good communication skills (oral and written).
• Knowledge and understanding of derivative
  securities. Both pricing and risk
  characteristics.
  
• Good problem solving skills. Comfortable with
  mathematical/quantitative concepts.
  
• Curiosity. Enjoy to learn new things. Challenge
  status quo.
  
• Programming skills are a plus. (Useful for
  prototyping)
  

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Are you ready for a challenge?

• Key Requirement Must be able to count
  correctly!
  
• Are you sure you can count? Take a look at the
  following puzzle

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Before
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After
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• Questions?
• Please send your CV to celine.girouard_at_tres.bnc.ca
  
  
• Subject heading CV-85801