PRMIA and the New Risk Management Paradigm

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The Professional Risk Managers International
Association

• PRMIA and the New Risk Management Paradigm
• David Millar
• Chief Operating Officer, PRMIA
• david.millar_at_prmia.org

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PRMIA the Global Organisation

• The fastest growing association for risk
  professionals with 55,000 members from all
  segments from 4,000 organisations in the
  financial services industry
• 150 2-hour to one-day meetings annually in 60
  chapters
• A member-led, grass-roots organisation run by
  450 volunteers with a small administration team.
  A not for profit owned and governed by its
  members
• Member services events, blogs and website
• Standards and exams the Handbook, other books
  and papers, the PRM exam, the Associate PRM exam.
• Training courses public and in-house

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What PRMIA is about

• A higher standard for risk professionals
• Bringing people and ideas together across
  cultures and industries through events and
  through the website
• A global focus, with local service, serving
  developing and developed markets for the good of
  the industry and its practitioners
• Member-led, member-driven it provides a forum
  for members with meetings, focus groups and
  resources
• Developing and setting standards for the Risk
  Professional and the Risk Profession
• Providing exams (the PRM and the Associate PRM)
  for people who want to learn, to demonstrate
  their skills and advance their careers
• Advancement of risk education through specialist
  public and in-house training,

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Some Recent Highlights
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Education the PRM Handbook

• Over 35 Leading Authors
• In Use in over 110 Countries
• In Use at 23 of 25 Worlds Largest Banks and all
  10 of Worlds Largest Financial Service Companies
  
• The best reference source for financial risk
  managers
• Available online and in print
• Work has now started on the update of Risk
  Management Best Practices (Volume III) create
  three books Credit, Market and Operational Risk
• ( A 2006 survey of the membership)

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Education - the PRM accreditation

• Syllabus
• The PRM Handbook plus material on the PRMIA
  website
• Objective
• To provide a common educational baseline for all
  Professional Risk Managers in the financial
  services industry.
• Comprises
• Statement of best practice
• Everything you wanted to know about Risk but
  were afraid to ask
• Foundations in Finance theory
• Practical elements of credit, market and
  operational risks
• The interface between risk and other disciplines
• Delivers
• Objective proof of capabilities

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The PRM

• Is PRMIA's most academically advanced program,
  designed to cater to all the needs of a Chief
  Risk Officer. Only successful candidates are
  entitled to use the PRM title. Essential to
  progress from Risk Analyst to Risk Manager
• Accommodates cross-over credits
• Exam I CSI Financial Risk Management and CAIA
  Financial Risk Management graduates
• Exam II Actuarial Associates
• Exams I II CFA Charter Holders, CIIA, CEFA
  Charter Holders, CQF Holders, Actuarial Fellows
• Exam IV the Associate PRM
• Four exams (in any order) Finance (2 hr exam),
  Mathematics (2 hrs), Risk Management (1½ hrs),
  Governance and Case Studies (1 hr) - 120 total
  questions
• Can be done in a year with a commitment of 8
  hours study a week - two years allowed to pass
  all 4 exams.

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The Associate PRM certificate

• Designed for staff entering the risk management
  profession - or those who interface with risk
  management - auditing, accounting, legal, and
  systems development personnel.
• Mathematically and theoretically less detailed
  than the PRM, the Associate PRM covers the core
  concepts.

• Successful candidates will understand fundamental
  risk management methods and practices,
  demonstrate they can make critical assessments,
  evaluate the implications and the limitations of
  such results, be familiar with past risk cases,
  and understand professional and ethical
  standards.
• The Associate PRM is a single, non-mathematical
  exam of 3 hours with 90 multiple choice question.

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How do I take PRMIAs exams?

• Teaching methods
• Classroom Training
• Online Courses and Diagnostic Exams
• Exam guides
• A DVD-based training program
• Self-Study Guide
• Professional Risk Managers Handbook, the
  Essentials of Risk Management plus freely
  available website material
• All exams sat via CBT (Computer-Based Testing)
• 4,200 test centres in 145 countries (14 in
  Shanghai, 22 in Beijing, centres in all the
  provincial capitals) all are open every working
  day of the year
• Minimal delay, user-friendly booking system,
  re-bookable with 24 hours notice customer
  focused, total flexibility
• ( In development for the Associate PRM)

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Why did the current crisis happen?

• Change in the borrowing/lending model, and the
  move from commissions and interest to capital
  growth
• Easy credit, poor lending strategies and
  securitisation
• Profit and bonus driven institutions short-term
  profit is the only goal, and there is no downside
• Governments encouraged growth, regulators were
  not in control.
• Liquidity was not understood and risk management
  was not carried out

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The banking model changed

• It used to be that investors and entrepreneurs
  gambled whilst banks provided the capital back up
  in the form of loans
• Now everyone is investing, i.e. gambling!
• Banks now have a much riskier model - but we
  operate under capital concepts from 1945, and
  capital levels from 1988.

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The lending model changed

• The cost of borrowing was less than the expected
  investment profit.
• Banks competed to lend so reducing costs further.
• Loans were granted without inspection or
  authorisation.
• The packaging and then slicing and dicing of
  loans means that the original credit rating is
  lost.

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The incentives model changed

• Reputational risk (other than financial
  insolvency) no longer matters.
• Banks are competing to poach the best sales
  people and offering guaranteed bonuses with no
  downside.
• In the largest banks, there is no downside as
  they know the government will pick up the bill.

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The control model changed

• Regulators have always been one step behind the
  bankers who employ experts just to get round
  banking regulations.
• Auditors can also be deceived about what they do
  not understand.
• Governments have sought encourage private wealth
  through incentives to borrow and now suffer the
  results of this.
• There is little cross-border control of
  cross-border banks.

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The risk models never got there!
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The result ..

• A financial system based on inter-bank liquidity
  and not on deposits
• An investment environment where it is easier to
  borrow than to save
• A culture where risk taking is rewarded with no
  penalty for failure
• A global economy where governments encouraged the
  above and where regulators were not in control.
• A risk management framework that was not up to
  the task.

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Would Basel II have prevented the crisis?
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Basel III?

• A change in the way credit ratings are allocated
  - but what?
• Either parts of strategic risk be included in op
  risk capital requirements or the template
  expands to include management and incentive risk.
• A surplus be built in in good years to cover the
  market cycles.
• A liquidity risk weighting be introduced.
• A risk weighting based on the ratio of deposits
  to loans (by industry segment)
• Can we do anything about reputational risk?
• The BIS get 12 mths to release this not 8 years!

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The future 1

• There will be an emphasis on a return to basic
  banking
• High capital levels will be imposed
• The return of Glass-Steagall (at least for
  reporting)
• Tighter, more visible credit authorisations
• Credit rating agencies will become part of the
  regulatory structure
• Credit will become harder
• interest rates will go up
• Global growth rates will decrease
• Ratings will become stricter
• The emerging economies will grow at the expense
  of the established economies

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The future 2

• Governments will encourage saving
• There will be guarantees on deposits (100K)
• A higher percentage of deposits will have to be
  invested in government stocks
• Margin trading and complex derivatives will be
  discouraged
• Regulations will get tighter regarding
• Capital levels
• Lending as a percentage of deposits
• Securitisation
• Insurance instruments
• Management responsibility
• Bonus payments will be tied to profitability
• Cross-border regulation

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The future 3

• Risk management will change
• Risk managers will have to sign off all
  activities
• There will be a formal risk management committee
  (as there is an audit committee)
• The following risks will be included into the
  rules
• Liquidity risk
• Remuneration and incentive risk
• Strategic risk
• Basel II will evolve into Basel IIa or III the
  above new risks will be included into Pillar 1
  - Pillar 2 will become more restrictive and have
  a more visible impact on capital requirements

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What does PRMIA plan to do?

• New exams using existing literature as standards
  supplemented by PRMIA papers liquidity risk,
  accounting risk, strategic risk, Basel II/III,
  etc
• More voice in global planning lobbying, public
  forums, etc
• More events/forums for members to hear and speak
• Reorganise and strengthen the blogs into official
  electronic debates
• Increase members services in making materials
  available
• Be seen to stand up and be heard.
• But we need help to achieve all this.

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and what should we be doing?

• Your ideas .

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