Organised by Indian Institute of Banking & Finance in Collaboration with Indian Banks’ Association (IBA)

1. 7th BANK EDUCATIONISTS’ CONFERENCE – 2005 Organised by Indian Institute of Banking & Finance in Collaboration with Indian Banks’ Association (IBA) Hyderabad, 28 November 2005 Technical Session I Risk Management and HR Issues Gordian Gaeta The Asian Banker, Singapore

2. Today’s Agenda • Introduction to The Asian Banker • Human Resources & Risk Management • The Future of Banking HR Requirements • A Call for Action

3. 7th BANK EDUCATIONISTS’ CONFERENCE – 2005 Introduction to The Asian Banker

4. The Asian Banker is in three businesses serving the financial services industry ... • Asian Banker Research • Asian Banker Editorial • Asian Banker Forums www.theasianbanker.com

5. … delivering business intelligence to the financial services community • Asian Banker Forums • Asian Banker Summit • Roundtables & Consultative Forums • Industry Outlook Briefings • Executive Programs • Asian Banker Research • Excellence in Retail Financial Services • Asian Banker 300 • Benchmark Exchange • Proprietary and Generic Research • Asian Banker Publications • Asian Banker Journal • Asian Banker Interactive • Asian Banker Reports

6. The Asian Banker – Global in Scope, Regional in Coverage Corporate Governance Rep: London l Risk Management Rep: San Francisco l New Focus: Korea New Focus: Japan l Payments and Operations Rep: New York l Branch Office: Shanghai l Backoffice processing Branch Office: Hong Kong l Branch Office: Kuala Lumpur New Focus: Middle East l Main Office: Singapore Distribution Strategies Retail Payment initiatives

7. 7th BANK EDUCATIONISTS’ CONFERENCE – 2005 Human Resources & Risk Management

8. Human resources are at the core of risk • In recent years we have come to comprehensively understand the structure of risk – the negative variance on an expected outcome • While we can understand risk, its predictability remains elusive as with all chaotic systems • People shape the risk profile of businesses • At the same time humans are the main solution to risk issues so we separate risk responsibilities and build risk systems … • … but, often, we fail to instill in our people sense of accountableresponsibility and understanding of the risk reward relationship inherent in all undertakings

9. Risk – the negative variance on an expected outcome Typical loss distribution Expected Losses Unexpected Losses RISK Frequency/ Probability f Skewed Outcomes Events Traditional outcomes $ Value of Losses/Outcomes

10. Largely, people cause negative outcomes Number of operations losses by causality factors Process 19% • Inadequate control (8%) • External error (3%) • No control (2%) • Late receipt (1%) • Increased volumes (1%) People 60% • Lack of attention (40%) • Poor communication (10%) • Inadequate training (7%) • Unclear roles (3%) Systems 21% • Failure/bug (8%) • Inadequate functionality (7%) • Feed late (1%) • Incorrect data (1%) Source: CSFB, Global Operations, figures rounded &

11. Currently, the solution seems to separate risk responsibilities and build risk systems … Bank spending emphases Primary responsibility for Risk CRM In % Cost management Customer acquisition Differentiation Marketing HUMAN RESOURCES This Will Be a spl Dept?? M&A Channel Brand equity Risk Technology Source: Risk Management Survey 2005, The Asian Banker

12. … rather than instilling an ‘accountability’ spirit in staff at all levels • Most staff live in world of insured risks, they act as administrators and if they follow the rules, they remain generally gainfully employed and unaffected by the outcomes • Too often there is widespread lack, in staff, of risk recognition, a sense of lack of responsibility for failure and by consequence, a will to find new or better ways of discharging their obligations • Adding layers of specialist management, segregation of roles and systems support may address the ‘tail end’ of the risk distribution but compounds the ‘moral hazard’ problem for staff in daily undertakings • Current human resource development does not foster individual accountability

13. When empowering staff, risk profiles change because behavioral standards deteriorate • Business specialisation and compartmentalisation of functions, delegation of activities and roles combined with third party involvement is growing • Fragmentation reduces overall perspective and pushes authority further down the line. Individual ambition and self-actualisation is driving this further?? • Competition, constant change and performance pressures increase the tendency for expediency without regard to risk implications • With a growing pace of change, we place great reliance on rules, handbooks and manuals but without specific behavioral principles to keep risks in check or to manage behavioral standards

14. Ethical Standards Behavioral standards are the complement to competence in true professionalism Universal, broad-based, compelling Community, narrow-based, voluntary Source Professionalism Codified, contestable, democratic Commercial & Other Laws Codes of Conduct Competence Specificity Fuzzy, elective, organic Morals & Culture Integrity

15. At business level, there is unanimity on a need for behavioral standards Business Ethics A system of (behavioral) principles (specific to the industry) that help determine right from wrong, good from bad in daily (business) life or when facing conflicts of interest (in discharging our professional responsibilities) Essentially, business ethics give guidance in autonomous choices of individuals when facing conflicts of interest or in situations in which an individual has a personal interest sufficient to appear to influence the objective exercise of duty

16. Yet, violations are widespread and a real life threat … • 48% of American workers admit to doing something wrong or illegal on the job, among others • cutting corners (16%) • covering up incidents (14%) • lying to or deceiving customers (9%) • 56% say they have considered it • Between 25-60% of employees surveyed admit to having seen unethical behavior • Only 11% of financial services managers who witnessed unethical behavior reported their concerns • Over US$50 billion losses, fines and damages due to staff misconduct in high profile cases

17. 7th BANK EDUCATIONISTS’ CONFERENCE – 2005 The Future of Banking HR Requirements

18. Banking of the future may look quite different than today • Retail banking will come to be the largest part of banking • Non traditional products and specialized segments will provide the base for growth. • The shift from manufacturing to distribution will continue • Providing customer solutions will shift emphasis from offering products to innovation ( focused) at the point of sale and advice • Non-strategic activities of banks will move to third party suppliers • Largely internal factors will determine success or failure of the bank mainly through ensuing risk profiles • People will be at the core of any strategy - they will influence the level of governance and regulation thereby determining the opportunities available Source: Mercer Oliver Wyman, various publications

19. Human resources will have to grow with business requirements • As many activities and functions will be outsourced, operational staff of today may have to migrate towards front line jobs • Traditional staff trained only in selected products will become a liability to the distribution of advice and solutions • Business skills, marketing and understanding customer needs will pose a different kind of challenge for existing staff • Assessing and extracting higher customer value requires better analytical and servicing skills tailored to the real needs of the market rather than the product offering of a bank • Risk appreciation and management skills will need to migrate to the customer interface

20. 7th BANK EDUCATIONISTS’ CONFERENCE – 2005 A Call for Action

21. The dilemma: what we train & develop may not be all of what we need for the future … What we need…. What we train …. Competence and Knowledge Management Rules and Regulations Products Responsibility and Accountability Values Selling and solution skills

22. The world of tomorrow calls for a different staff and different development priorities Growing competence alone will not win – a different mind set and conduct is necessary • Real accountability, regular non-supervisor appraisals and subsequent staff action • Augmentation of management control through a staff development agenda • Models and codes for behavioral standards with commensurate corporate culture and disciplines • Reward systems that engender functional behavior and quality business • Clear standards for selling practices and customer service • Widespread appreciation for business risks and regulations to safeguard the bank

23. Thank you Gordian Gaeta The Asian Banker, Singapore