MAS: three steps to better risk management

Singapore's central bank helps financial institutions on risk management

SINGAPORE – Speaking at the 2nd Annual Risk Management Conference in Singapore on June 30, 2008, Teo Swee Lian, deputy managing director, prudential supervision, at the Monetary Authority of Singapore (MAS), advised financial institutions to view the current period of market turbulence as an opportunity to address weakness in risk management frameworks.

“Financial institutions should see this as an opportunity to identify and make improvements to their existing risk management frameworks. Coming up with a checklist of ‘dos’ and ‘don’ts’ may be necessary to deal with shortcomings in certain areas. However, in view of the nature and complexity of risk, and the limitations of resources, adopting a static approach to risk management is neither realistic nor adequate,” said Teo.

Teo focused on the importance of stress testing and for the risk management to be the responsibility of the entire enterprise, with active involvement and direction from the board. To attain this higher level of risk management, Teo suggests a three-step process. “First, the board and senior management must take the lead and be actively involved. Risk taking must be aligned with the risk appetite set by the board and enforced through appropriate controls. … Secondly, institutions must work towards having a firm-wide integrated process of risk identification, analysis and management. … Third, there must be effective challenge. For example, middle-office expertise should not lag behind the innovations of front office. Senior management should comprise people with experience in a broad range of risks.”

“This development of a firm-wide culture should reinforce ownership and complement the use of traditional methods of risk management, such as notional exposure limits, internal controls, adequate levels of provisions and liquidity reserves, and contingency funding plans,” she added.

Teo stated that, because risk management expertise is a scarce commodity in Asia, the third step would present a challenge. However MAS is working closely with the industry and academia to build up risk management expertise in Singapore.

She also stated that MAS will also use the opportunity to strengthen its role as a supervisor: “MAS will continue to engage financial institutions on their risk management practices, and to ensure that capital and liquidity buffers and estimates of potential losses are appropriately forward-looking. During this phase where the industry as a whole is seeking to internalise the lessons learnt from the crisis, institutions can expect more in-depth supervisory challenge by MAS on the appropriateness of their risk management frameworks, especially in areas relating to stress testing and contingency planning.”

MAS is also planning to continue to adopt a macro-prudential orientation over and above its day-to-day supervision of financial institutions, said Teo.