Tag Archives: Risk management

Is Basel IV around the corner?

I recommend reading the discussion paper issued by the Basel Committee in July 2013: The regulatory framework: balancing risk sensitivity, simplicity and comparability. You can download the document at http://www.bis.org/publ/bcbs258.htm

The paper confirms recommendations I have been giving banks for some time, that they should be separating Economic Equity, used as a management metric, and Regulatory Equity, used as a supervisory imposed constraint. The two are different, their use is different and the models to calculate the equity should or be different. The difference is like management accounting and financial accounting.

For the first time I read that the Basel Committee has accepted the idea that these two are indeed specific and should not necessarily converge. Admitting this changes considerably how banks can respond to supervisory constraints and how the Committee may change its Capital Adequacy recommendations. Actually the Committee has discreetly unveiled some fundamental potential changes that could be excellent news for the vast majority of banks, the banks supervisors and in general all bank stakeholders. Good news for all except for some solution vendors and consulting firms!

But before we discuss these potential changes, there are a few other comments made by the Committee in this paper which need to be underlined.

I will pass on the very good job done by the Committee in justifying their work in Basel I, Basel II, Basel 2.5 and Basel III. Indeed the work done is impressive and the paper is worth reading if only to remember some of the fundamental goals that lead to the development and evolution of the capital adequacy principles and rules. I also appreciated the frank discussion on the key requirements of defining risk based equity requirements based risk sensitivity, simplicity and comparability. We all agree that there are some good risk sensitivity models, but also that they contain certain weaknesses, that they are not simple and that they don’t always allow for ease of comparison. What is not explicitly mentioned but is implicit in the paper, is that the rules and all the comments are written for large internationally active banks (IAB) and the focus of the discussions are around the Global Systemically Important banks (G-SIB). These of course are a minority in the total number of banks and although they deserve the full attention of the regulators and of the Committee, it would be a mistake to disregard the other second tier and smaller banks for which internal models are probably not the appropriate approach at least for compliance. How often have I met bank senior managers and board members that stated they wanted to go advanced IRB as a principle, not for any rational reason?

The resources (financial and human) required to implement internal models is out of the reach of most banks and in many cases would lead to wrong estimations of risks and hence faulty strategies. The reasons for this are many and the controls by the regulators often lacking. The ultimate bad choice is for banks in emerging financial markets to opt for internal models. The tail risks will be huge in these markets, riddled by black swans and lack of market depth and efficiency.
In very diplomatic terms the Committee is not far from admitting this and even suggest that a radical revision of the rules is possible (in the long term) which could include the definition of compliance on the basis of a “Leverage and a Standardised approach” (point 75 bullet 2 of the discussion paper).

“Under such an approach, the regulatory framework would use a leverage ratio and a standardised risk-based approach together, but abandon the use of the internal models approach. This would preserve the “belt and suspenders” approach introduced by Basel III thus limiting regulatory arbitrage and over-reliance on any single model. It would also substantially simplify the regulatory framework, and make the derivation of bank capital ratios more transparent and understandable for all, although ex ante risk sensitivity would again be reduced.”

Personally I see many advantages in such an approach for the whole financial market as the rules could be applied to all banks, on all continents, in all markets. The use of internal models could still be allowed but for limited number of banks such as the G-SIB and a selection of large IAB, but these banks would also disclose under the standard “one size fits all” rule, allowing stakeholders to compare the banks between them and for the small group going internal models to compare that with the standard rules. It should also be made clear through segregation of the disclosed regulatory risk capital the cost (in capital) of being a systemically important bank. Shareholders must know the cost of being TBTF.

Basel IV is around the corner, but how far is the Committee ready to change? Going to the kind of simplification suggested above would probably kill its credibility!
But a major simplification of that nature would meet the constraints of simplicity, comparability and still be risk based.
The responses to the discussion paper are to be sent to the Committee by October 11th 2013. I would suggest that responses not be shy and go the whole way towards simplification. Remember simplification towards standardised rules does not mean “stupid rules” but transparent, understandable and effective risk based rules.
The separation of capital adequacy constraints from management constraints, through independent (but reconcilable) equity models, is an important change in the Committee’s view. It allows for a refined analysis of risk on the basis of the objective of each measure, compliance and management. Management can use simple or more complex internal models if they actually believe that improves their capacity to optimise risk adjusted value and profitability management.
I’m interested in your comments, please tell me what your position is.


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Risk & Relationship based Pricing Part 5

This continues and completes the description of good risk and relationship based pricing principles.
Principle 6: Define cost allocation strategy and models
As a general principle all customers should pay the costs associated with the product they buy. The questions are:
1. What costs should be allocated?
2. With what level of granularity should these costs be allocated?
3. How are you estimating these costs?

In the ideal world the cost allocations should be done are the most granular level possible. This means, as an example, that the ATM costs should be allocated to each customers on the basis of the ATM usage by the customer and all ATM may have a different cost structure on the basis of location and other variables. This requires a very big and complex cost allocation system that can individualise all costs (and revenues) at client/ contract level. Teradata for example has such an application, but be warned it’s a big project to implement!
But is this good enough? Not if you just allocate past costs, as we are looking at future cash flows of revenues and costs! Those future costs will vary in time due to inflation, capacity, operational efficiency etc. This means you have to estimate future volatile costs based on historical allocations. Not impossible but definitely not easy.
What could be the consequences of allocating future costs as they are expected to occur, while revenues are dependent on the contract characteristics? Take a mortgage with fixed monthly instalments. The revenues of such a contract will be very high during the first years then very quickly drop to become small in the following years, while operating expenses for this contract will remain stable and even increase through inflation. The net profitability schedule will show higher profits followed by many years of losses! Actually this is the simple consequence of accrual accounting and should be adapted in management accounting.
Some banks want to allocate all costs down to the taxes associated with the product. That is actually easier to do, but is it correct? Should the customer pay the bank’s corporate income tax, or the Chairman and CEO’s airplane? Should the customer pay the cost of the Equity allocated to the products he buy’s.
In my opinion the answer is definitely no. The principle is that customers must pay the expected losses and the expected operational expenses (direct and indirect), but that the shareholders should pay unexpected risks and indirect costs, at least the indirect costs generated because of the nature of the corporate activity (being a bank) and thus including regulatory expenses, general management, audit and control costs… Yes these should be paid by the shareholders through reduced net profits (RoE) and dividends. An all-in cost invoiced to the customers would have them pay the inefficiencies of management and would make the banking products unaffordable.
Also core is the cost quantification model used. What cost accounting models should be applied? Average costing by product, by process or activity based costing…?
Decisions on the cost allocation strategy will fundamentally change product pricing and profitability. What is appropriate for your bank, your market, your global strategy? How is your bank analysing this/ Life Time Value of the contract, or if you prefer the Fair value of the contract after all costs allocations appears to me as the only financially correct way of giving a value to that contract/ client.

Principle 7: Define, quantify and manage current and future client profit and value contribution
It is evident that bank profitability and shareholder value requires appropriate pricing. But excess pricing can destruct value by killing growth and client satisfaction. To avoid that pricing must be “efficient” i.e. be fixed on the basis of risks and market/ client specific demand and price elasticity.
We believe this means that client pricing but consequently the client’s profitability analysis, must be granular and forward looking. Average profitability of products, multiplied by the contract size, which is added to the profitability also calculated on an average basis, will only give you an average historical profitability of little use to manage your client in the future.
Is your profitability analytics compatible with modern value metrics, such as the Customer Fair Value, which we can be summarised as the fair value of the client current product holding (multiplied by client behavioural variables) plus fair value of future product holdings (multiplied by the related client behavioural variables).

risk adjusted current and future client value

risk adjusted current and future client value

Such a model will highlight and individualise the behavioural sales/ marketing risks and allow the management of business uncertainties. LTV is metric to integrate and manage all client value drivers: profitability, growth, risks and time.
We will discuss customer value in détail in a future series on this blog.

Principle 8: Manage competitive pricing
How should the bank integrate pricing information from the market, from competition?
What should the bank do when it models a theoretical risk and relationship based price (for a product sold to a specific prospect) which differs from the market prices?

  • Reduce its price to meet competition?
  • Increase its price when it is lower than the market price?
  • Keep price unchanged?

A simple question but a very complex answer, requiring a multi-dimensional analysis!

  •  How to handle market inefficiencies and bank specific inefficiencies?
  • How do you integrate product life cycle and relationship life cycle?

These multidimensional analysis should allow you to understand pricing inefficiencies and market/ pricing opportunities, but don’t make the client pay for your inefficiencies and always manage pricing in a transparent and open way with the prospect client.
Remember abnormally high spreads can lead to immediate profits but negative values because of increased attrition. You need a long term value measure to manage your client over a long term horizon, and the at least the life time cycle of the product holdings!
Strategically you may want to sell a product at breakeven or at loss because you are buying market share or you have bundled that product with high profit/ value products. In all such cases you must calculate the loss and/or negative value generated for allocation as a cost to sales/ marketing.

Principle 9: Manage the complexity and risks of your quant models.
Bank management is complex because cash flows are volatile and behavioural. Managing that complexity requires deep understanding of the market, the client, and the product value drivers.
Each bank must adapt the complexities of its business models to its needs and markets. It should use quant models that are useful for its specific strategies and market constraints (often restricted due to weak data quality and availability).
From a practical perspective, the bank’s sales force does not need to understand all these complexities. You must package products in a way that can optimise the sales unit efficiencies.
Likewise clients do not need to understand all the complexities of the product. Managing risk and operational intermediation risks is what bank should do. They must package the products to make them attractive but without hiding any financial risks that you could be transferring to the product buyer. If you sell a variable rate mortgage inform the customer that there is risk in such a product for him (the bank has passed the financial risk to the customer because it will not or cannot manage the interest rate…). Finally be transparent in pricing, client will understand and appreciate this honest and professional attitude.
Ensure strong communication between your sales force and the clients, based on a simple list of core variables such as:

  • Price is dependent on risk and collateral,
  • Standard, off-the-shelf transactions are cheaper than tailor made products,
  • Pricing is a function of operational process, automated process (internet banking) will be cheaper than 1:1 branch operational support.

Principle 10: Adapt the organisation to the requirement of risk and relationship based pricing
A close integration of all risk management processes and policies with other parts of the process flows, will generate operational and management synergies. In other words banks should consolidate management analytics and resource allocations and break operational silos. This has often been said but not often realised! The evolution of data management and management analytics can achieve what enterprise culture has often shied away from!
Consolidation of management analytics and resource allocations will include Enterprise wide Risk Management (ERM) capabilities, with often new and specialised functional responsibilities (Risk Transfer Pricing, Economic Capital budgeting and allocation, Risk policy recommendations and strategy implementation…). On that subject please don’t look at ERM as an organisational issue (bring all risk functions under one umbrella headed by the CRO. ERM is much more that that!
Breaking operational silos is ensuring that the process flows are managed from client product request to product delivery in the most efficient and effective way, and is focused on client satisfaction and the bank’s performance criterias (KPIs) including operational capacity usage and cost efficiency, Economic Equity optimisation etc.
I recommend that such an integration project completes a thorough “impact analysis” on all aspects of the business model: Process, Organisation, Data, Applications and Technology, or PODAT analysis.

Principle 11: Integrate pricing process within an efficient process flow management system, from the origination of the client request to its fulfilment
Pricing is just one element in a chain of processes from origination to product delivery.
In the case of a loan these will include:

  1.  application analysis and qualification,
  2.  product matching to client requirements,
  3.  credit analysis – – scoring & rating,
  4. credit structuring & pricing,
  5. credit approval,
  6. documentation development and signature,
  7. verification of condition precedent,
  8. disbursement(s),
  9. contract management (interest payments, interest rate fixings…),
  10. collection.

Any delay or mismanagement of any of these activities (themselves usually divided in multiple operational, analytical and management process) will have negative impacts on the bank’s value drivers!
Control and automation of these activities and process are essential to sustain efficiency and strong business development.
The activities and process are data driven, rule driven and model driven. Without clear Policies and Procedures the bank cannot achieve operational efficiencies and respond to international standards of good management. The bank must manage the related operational risks and have strong audit trails on all activities.
Regulatory constraints and capital adequacy rules are dependant of these activities and must be fully integrated.

Principle 12: Integrate risk underwriting and pricing in an integrated sales and marketing strategy
Efficient process, good pricing models and strategies can result in very bad client management if behaviour analytics are weak and below standard.
We will define the behavioural analytical models as:

  • Credit scoring models that allow appropriate credit risk rating (for risk management purposes and/ or not for regulatory purposes);
  • Collection scoring for appropriate collections management;
  • Marketing scoring models that allow the development of appropriate client information (intelligence) such as sales propensities, attrition risks etc.
  • The client score card for credit risk and product ownership (business) risks is a core input in financial risk management (interest rate, liquidity) and capital management.

Risk appetite and risk allocation will be RAROC (or RORAC) dependant and global strategy must manage the Earning at Risk (EaR), due to all the risks underwritten by the bank.  An Adjusted Return on Risk Adjusted capital (ARORAC) is an interesting approach of integrating the bank’s solvency in the equation. We will define ARORAC as the RORAC minus the Risk Free Rate (RFR), divided by the banks’ market beta.

Principle 13: Optimise risk appetite, risk budgeting and allocation and pricing towards clear and precise performance criterias
The 2008 – 2012 great banking crisis has imposed stricter internal risk management constraints not only in capital adequacy but also and possibly more importantly in the bank risk policies, strategies, models and process of risk management.
Consequently this puts new challenges in the Financial Control function of the bank and in its management accounting policies and procedures.
In parallel financial accounting (IFRS) is implemented and includes different approaches to the risk management concepts defined under the Basel Accord and Best Risk Management Practices(BIS).
All the approaches are valid, but different hence they need to be reconciled!
Shareholder Capital is at a premium. It is rare, expensive and insufficient to cover all the needs of the market. Strict Economic and Regulatory Equity management is an absolute requirement. This translates into new solvency management requirements.
Banks develop new Key Performance Indicators (KPIs) to meet these challenges. They must be integrated into pricing to generate value manage value drivers.
This can only be achieved if pricing is relationship based and risk based.

This concludes the series on risk and relationship based pricing. I realise that this helicopter view of the “best of class” approach can seem excessively complex for many banks and markets. High competition, highly volatile markets, the increasing complexity of products sold and the increasing weight of regulatory constraints, will force all banks to enhance pricing models and strategies.
I hope my view of the subject will generate comments and discussions.
Please don’t hesitate to add yours on the blog.
Next series will cover customer value metrics.
I will then start a new series regarding a new approach in credit risk management using available but rarely used data. I’m talking of Event Based Credit Management, which I am developing with a good friend and partner, Mark Holtom. Mark is founder and general manager of eventricity an expert in Event Driven marketing. I strongly recommend you check him out on www.eventricity.biz

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Corporate Banking Relationship Management Masterclass

How to increase the quality and depth of client relationships and create client dependency to the bank, through strategic thinking, adapted product or solution development and sale, and the on-going development and delivery of ideas of strategic importance to the client rather than a series of transactions dependant on price competitiveness.

To be an effective the Corporate (and/or Institutional banking) Relationship Manager must have many human and technical skills and competencies. He must also operate in an organizational environment that leverages interdepartmental expertise and a spirit of collaboration to achieve a common goal.

To develop an efficient relationship management capability, different competencies are required. The components of this training have been developed over time through direct “in the field” experience and exchanges with many banks around the world. The management concepts and the related case studies have been taught to banks in many countries in Western and Eastern Europe, Africa and Asia, with a very high satisfaction rating by all participants. The proposed management model is used in all leading corporate banks.


The training is organized for maximum 24 participants because of its interactive nature.

This course is directed towards:

Bank corporate sales and marketing teams:

  • Corporate Industry Team Leaders,
  • Institutional banking Team Leaders (Sovereign Relationships, the Banking clients, Insurance clients and Pension Funds, Asset Management and securities firms…),
  • Corporate Relationship Managers (SME and Large Corporate and Institutional).

Bank product specialists and support teams:

  • Treasury client teams and financial engineering teams,
  • Corporate Finance and Investment Banking specialists (origination and sales).

Bank support units

  • Senior Bank Management and Finance Management,
  • Risk management staff (credit and other financial risks),
  • Corporate legal teams.


Participants must have a minimum knowledge of corporate or institutional banking and a good understanding of financial markets. They should have minimum financial analysis competencies (understand a balance sheet and income statement).

Participants must be willing to participate actively in the case study and role play game.

Course objectives

The objective of this program is to develop competencies to optimize “value based corporate client relationships”. We propose methodologies and management process that will maximize the efficiency of relationship managers (RM’s) and help them maximize the benefits that their customers will derive from a partnership relationship with the bank.

We believe that banks should move from market share and wallet share (retail banking concepts) to a concept of “share of the mind”. This will generate rewarding client partnerships (profit and financial value optimization). To achieve this RMs require financial and management skills and access to product specialists and other competencies of the bank. More specifically they must get the support of the Product Specialists (PS’s): Treasury, capital markets and Investment Banking, Risk Managers etc…

This approach implies good technical competencies and skills in financial value based management, corporate finance, project management competencies as well as soft skills such as leadership, selling and negotiation skills.

The Desired Outcome of the process is to increase the quality and depth (penetration) of client relationship and create client dependency to the bank, through strategic thinking, adapted product or solution development and sale.

The core processes of the approach are:

  • to generate a flow of “proprietary client information”,
  • to develop value based analytics,
  • to convert the information into creative ideas of strategic importance to the client,
  • to manage a Client Response Team including all the subject matter experts required,
  • to structure and price the proposed solution on a relationship based and risk based approach.
  • to sell and negotiate efficiently for a win-win outcome.

The success of the process is the on-going development and delivery of ideas of strategic importance to the client rather than a series of transactions dependant on price competitiveness.


The program is organized to review of theoretical concepts and methodology required to implement a Relationship Management capability based on a “Corporate Finance Model”, focused on client value maximization rather than a “Product Push Model” which is these days inappropriate. The competencies required to go beyond the simplistic sale of “off the shelf product”. They are those required to build a 1 to 1 partnership with the client. The proposed approach allows a true understanding of the customer needs, value drivers and Key Performance Indicators and hence allows the bank to respond in a focused and rational approach with high value product and service.

The Role Play Simulation Case Study will give the participants the opportunity of implementing in a quasi-real life situation all the ideas and concepts reviewed with them. Through this approach we place participants in a situation that is close to the daily responsibilities of client executives and product specialists, but in a controlled way so that we can check the implementation of the methods and concepts. We also believe that RM’s must produce their best results in a competitive environment. Hence the case study is created so as to develop competition between the participants. For a description of the case study please see below.In practical terms we will review the concepts in the morning and apply them in the afternoons through the case studies. The concepts reviewed include:

 The Relationship Management Process

– Introduction
– Determining high potential prospects and clients
 A four-part analysis for high value client selection
 Information sources and their management
 Building the Knowledge Base
– RM process and methodologies
 Deal Assessment
 Idea generation and deal structuring
 Calling Strategy
– Management templates
 Relationship Review
 Relationship Plan

Applied Corporate Finance for Relationship Managers

– Introduction
 Why Financial Management skills and Corporate Finance skills?
– Review of Corporate Finance principals
 Corporate Finance Introduction
 Corporate Value Analysis: qualitative and quantitative analysis
 Value Creation variables and valuation methodologies
 Develop and manage client value by focussing on “value drivers”
– Review of Financial Management principals
 Financial Markets and Products
 Basic financial contract valuation techniques
 The building blocks approach and financial engineering
 Pricing and managing complex financial solutions
– The “Corporate Finance” model organisational impacts
 The CF model from the marketing and sales perspective
 The CF model from the product delivery perspective
 The CF model from the support unit perspective

 The Rain Man with the Role Play Case Study 

– Introduction: the Rain Man!
 Relationship and sales performance measure
 Marketing versus Sales
– Managing Multidimensional relationships
 Relationship dimensions and stages
 Marketing yourself, the organisation and the products and services
 Relationship assessment (with self assessment exercise)
– Selling & negotiation skills
 Review of the prerequisites from an effective negotiation
 Negotiation tips and tricks

Role Play Case Study description:

Group divided into 2 banks and 2 corporate prospects (or any other combination as decided by the trainer on the basis of the number of participants).

  • All banks and companies are managed by a team of 2 to 5 managers;
  • Banks have Relationship Managers and Product Specialists,
  • Companies have only global management representatives.
  • All banks and companies have known business characteristics and some “confidential and specific characteristics” only known by those that need to know.

The two companies both have a new project that requires financing and/ or other financial services/ products needs. The projects have been mentioned in the press. Meetings will occur between the banks and the companies to:

  • Discover the details of the potential transactions;
  • Decide on the financing needs. Companies will express their requirements and banks develop an appropriate “solution”;
  • The “confidential information” has value and will only be shared with the other party if a true partnership can be developed. This confidential information is essential to make the best proposition.
  • Present the requirements, the offer and negotiate conditions
  • Make a choice of partnership.

Bank/Client meeting will last between 30 and 45 minutes and preparation and debriefing meeting will last between 20 minutes and 1 hour. Classroom meeting will occur between each step of the simulation game for the course director to comment on what he heard and saw and to expand/ review some of the skills or technical characteristics required.

At the conclusion of the program the participants will have gained a real practical and pragmatic understanding and skills in:

  1. How to generate fruitful partnerships with their customers and prospects,
  2. How to develop innovative value based financial solutions that meet their clients real strategic needs,
  3. How to manage the Bank’s Product Specialists to ensure a smooth delivery of the proposed solution,
  4. How to quantify the contribution of the relationship to the value and profitability of the bank
  5. How to sell and negotiate all conditions (including price) with the bank management and with the client.

The case study although simple (it does not require in depth credit analysis and a lot of data modelling) is very close to participant’s day-to-day reality.

The course avoids generic academic management concepts and models, to focus on real life, innovative Corporate Banking Relationship Banking models as they have been applied in the leading international corporate banks.

The participation of product specialists of the bank is enriching for them and for the RMs participating in this training, as is the participation of market specialists and corporate managers.

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Filed under Corporate Banking Master Class

Retail Bank Strategy & Performance Training

Retail Bank Strategy and Risk Based Performance Management Masterclass, with BankStrat computer based simulation game, by BC&T Ltd

A framework to provide bank managers with the essential competencies to develop Value Based, Risk Adjusted, Compliant bank Management Strategy and the opportunity of testing those skills in a quasi-real life bank management simulation.

A Masterclass Program:

The aim of the programme is to develop retail bank global and operational strategies to: create value for all stakeholders, within risk constraints and in compliance to regulatory constraints. As all bankers know this is complex and technical. Managers must have a good understanding of these financial and quantitative models to structure their business strategies. Relationship based management implies selling the right product to the right customer at the right price and risk based management implies that the underwritten risks are managed within board and regulatory policies and limits.

It is not sufficient to “hear about” the underlying financial concepts; managers must experience the outcome of strategic management decisions to fully understand what is required to generate a winning strategy. We have developed a program that includes the main strategic management domains that the managers must master, and linked the review of these with a hands-on pragmatic, near real-life computer aided bank management simulation.

The training is not intended to create technical specialists in any of the management domains, but to help the participants become truly bankers that can think globally and generate winning strategies that maximize the bank’s risk rewards.

The content and case studies are proprietary and cannot be copied without the explicit approval of Clive Wykes of BC&T Ltd.

Targeted audience and Course Duration

This is a 3 to 10 day training. Ten days may appear to be a very long break from work. To review all the concepts and apply then in the simulation game is a major effort and 10 days will be required for staff without general or departmental management experience. Shorter versions of 3 or 5 day are also available either because we concentrate on only one or two management domains or because the participants already have a strong knowledge and understanding of bank management models (senior managers), in which case they are interested in looking for the integration and dependencies of management domains and the art of strategy development under constraints.

The training is organized for approximately 10 to maximum 24 Managers. They should all have a good understanding of finance and banking.

The programme is focused on a strategy development and implementation to optimise all the drivers of bank value (growth, risk and profitability). Theoretical concepts are supported by a bank management simulation programme, where participants define their bank’s policies, strategies and tactical implementation plans by managing:

  1. Sales and marketing strategies,
  2. Treasury strategies,
  3. Enterprise Risk Management (focused/ limited to Interest Rate Risk, Liquidity Risk, Credit Risk)
  4. Risk appetite and economic equity budgeting and allocation,
  5. Solvency (the bank’s credit rating) management,
  6. The equity compliance (Basel 3).

This course has been very successfully delivered at Board level, senior management level, and specialised business units, down to entry level management teams. Specialised business units have found it very useful including:

  • Risk (credit, ALM, compliance) Management Business Unit (BU),
  • Retail Sales & Marketing BUs and retail distribution units,
  • Private Banking BUs,
  • Corporate Relationship Managers,
  • Management Accounting and Financial Control units
  • Strategy and planning BUs,
  • Audit teams,
  • As well as IT and solution vendors.

Course Material

All the course material is delivered in electronic format. This will include presentation slides, descriptions of the main financial concepts, the simulation information of which the participants guide and initial simulated bank financial package.

Course objectives

Provide bank managers with the essential skills to build a framework for enhanced performance. The programme will help to:

  • Define the bank value metrics and risk adjusted value drivers (RAROC, EVA,      Economic Equity, VaR, EaR…)
  • Develop value based operational strategies based on the bank’s mission and      shareholders’ vision, and integrate them in the global strategic planning      process;
  • Develop of risk optimisation strategies including risk quantification, risk      budgeting and pricing as well as risk management (Including: credit risk, market risk, interest rate  and liquidity risks (ALM), operational risks, business risks, solvency risks…)
  • Analyse competitive positioning and differentiation, including product development      and management (piecing etc), marketing and Client Relationship Management      as well as Event Based Marketing
  • Define, measure and manage Client Profitability and Value (Customer Value      Management)

This is an intensive, high value programme with a steep learning curve.

Content and Methodology

Content description:  Bank Performance Management

Bank strategic management requires quantitative and qualitative analytical competencies. They are confronted to new regulatory constraints and enhanced competition in a global financial market! A rigorous management framework is of vital importance to ensure leadership and management success.

All management domains need to be integrated into a global strategy, in order to ensure the balance between growth (commercial strategies), risk (Enterprise-wide Risk Management strategies) and value (sustained profitability strategies). Without sound and robust risk based management the financial industry will continue to be submitted to regular and very severe financial crisis!

We will also analyse the consequences of the great Banking crisis of 2008 and learn from these events to improve the quality of the management responses to extreme volatility. We will also discuss the new capital constraints (BIII) and ICAAP requirements.

Case Study description: management of a simulated bank under risk constraints and in a competitive environment!

The course is based on the principal that the learning experience is enhanced by hands on exercises that replicate real management situations, where participants can test the concepts learned and analyse the result of their analysis and management decisions. Hence we have created this course with a high level of integration between theoretical concepts, valuation models and risk management methodology descriptions and computer aided Bank Management simulation.

In the simulation and all class room discussions and workshops the participants are divided into a number of management teams (maximum 4). These are typical management team of a small bank. The size of the group will vary on the basis of the specific training objectives and characteristic. Teams can be constituted by a single individual to a maximum of 4 to 5 participants.

Each team will make management decisions in different management domains:

  1. Strategy definition including markets, risk policies & limits, performance criterions…
  2. Marketing & Sales i.e. client and product  management (pricing, sales volume budgeting, marketing campaign investments)
  3. Risk management (credit risk, interest rate risk, liquidity risk and solvency risk)

Decisions made by the management teams are input into the computer simulation programme, which calculates the effects of all the decisions and prints a Management Information Report with the results. All the information required to develop and justify the management decisions are in this Management Report including:

  1. General Market information (economy, interest rates…);
  2. The Bank’s Balance Sheet and Income Statement;
  3. Profitability report;
  4. Risk reports;
  5. Compliance reports;
  6. Marketing reports.

The simulation is organised in such a way that each management domain is isolated to improve the analysis of causalities of results with participants’ decisions. In the final decisions participants are required to manage all the variables together and report on their strategy and the outcome of the decisions..

The objective of the simulation is to develop a strong understanding of the key factors that contribute to the optimisation of a Bank performance. Strategic Value Based Performance requires a sound understanding of many management variables sometimes complex and very quantitative. We have simplified some of these domains to make them accessible to non-specialists. For the participants it is important to understand the dynamic of all the management domains and their impact. To illustrate this point the Bank must manage its risks (credit risks as well as Interest Rate Risk, Liquidity risks and Solvency risks). The way to do this is to assume risk (“buy or sell risk”) for an optimised amount, under risk constraints (equity compliance) under profitability constraints (revenues and cost efficiencies) and under value constraints (Economic Value Added performance metric and share price).

For further details please refer to our information brochure “Bank Management Simulation to enhance the results of training”.


The participants will gain useful understanding of bank performance dynamics and more importantly will have a real experience of managing the bank and responding to the challenges of the environment in a near life experience. They will have a good (but general) understanding of three major management domains in Retail, which will be of immediate application on their day-to-day responsibilities.

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April 1, 2013 · 12:44 pm

Risk & Relationship based Pricing Part 1

Bank Pricing Strategy

A forward looking complex management challenge for most big or small banks on all continents.

Jonathan Witter, Capital One’s (COF) president of retail and direct banking, predicts that over time, “we will see the advent of different pricing models, and we will see the advent of different feature models” (extracts from an article in AmericanBanker of March 18, 2013). McKinsey reported that less than 5% of the Fortune 500 companies have a dedicated pricing function.

If you agree with these statements, and I cannot find any reason to disagree, you have to ask yourself:

  • What do the other 95% of the Fortune 500 do?
  • What is the state of business for smaller companies?
  • Are banks better off or not?
  • Is this important and why?

My experience on all continents is that banks are probably worst of because of the nature of the banking products and services. Think of the differences in pricing a commercial good, a widget, sold to the sale of a financial contract.

Industrial/ commercial goods

The widgets are priced on the basis of known historical Cost of Goods Sold (COGS) and Sales Costs and margins adapted to the sales strategy and lifecycle of the product. The sales margins and profitability are easy to calculate and manage. Sales & price strategies focuses on marketing efficiency

Financial contracts

Financial contracts are sold on the basis of future operational costs and risks. Even if these future costs and risks can be estimated, they are uncertain because they are projected. Bankers must manage these uncertainties. The sale is completed only when the product cash flow cycle is completed, that can be in 1 month, 12 months… or 30 years! Throughout the cycle margins will vary. How do you integrate that uncertainty in the bank’s sales strategy and pricing strategy and models, and how do you manage that uncertainty?

To start answering the implied management questions, you should define and quantify these uncertainties and measure their volatility.

Operational cost uncertainties. In financial contracts the margins are contractually fixed (even if some products refer to reference rates or indices to fix the all-in rate as for variable or floating rate products). But the costs related to that product will vary through inflation, operational efficiency etc.

Financial and business risks, uncertainties. We can commonly agree that all financial products contain (1) Credit Risk or solvency Risk, (2) Interest Rate Risk, (3) Liquidity Risk, (4) Foreign Exchange Risks, (5) Business Risks, (6) Operational Risks, (7) Regulatory (Compliance) Risk, plus possibly some more!

All these operational and risk need to be defined, quantified and managed. The cost of managing the uncertainties, hedging the risks must in theory be expensed to the client, and the residual margin will constitute the “sustainable risk and relationship adjusted profit” of that transaction. Note that a measure of the sustainability would be the Life Time Value of the product

The introduction of value management by opposition to profit management is essential, because it is a forward looking measure of profit contribution defined around the all the future volatilities of the product related cash flows. Understanding these value drivers/ destructors and integrating them in the bank’s pricing model is the only way to take control of the commercial and sales strategy of the bank.


Pricing products is not trivial and it is complex.

All banks measure product and client profitability. But what model is used? With what data: average financial data or granular, historical financial data or projected data? Are customer projected behaviour integrated?

All banks price products, by definition. But how efficient, precise, flexible, useful are they?  Are they related to profit or value targets?

These are just a few of the issues possible.

I have prepared a brief slide presentation (available on SlideShare.com) in which I mention 13 good management principles to integrate in a pricing strategy and model. I want to expand a little on the solutions available and the strategic importance of this subject before I review the 13 principles over the following weeks/ months.

With some luck you will give me your comments, criticisms, suggestions as we go. I can then integrate all the ideas into a set of final recommendations.

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