Insight into Risk Management

Richard Allen - CVA Market Risk Manager

RiskCitigroup believes that effective risk management is of primary importance to its success.

What is Banking all about?

Banking is primarily about balancing risk and return

Risk is involved in every deal / transaction and managing current exposure to make sure that:– Risks are identified and assessed (e.g. do we want to lend to a client; why? how much?)– Desired return on capital is achieved– Protection is in place against risks resulting from specific transactions (e.g. when trading Euros we

avoid buying too much unprotected in case the exchange rate would drop)– Potential errors by the bank or its employees are avoided

There are three main types of front-line risk:– Credit risk is the potential for financial loss resulting from the failure of a borrower to fulfill its

financial or contractual obligations (e.g. in lending, sales and trading: derivatives, securities transactions)

– Market risk Price risk – risk of loss from changes in interest rates, foreign exchange rates, and equity, bond or

commodity prices Liquidity risk – inability to meet a financial obligation to a customer, creditor, or investor when due

– Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems or human factors, or from external events (e.g. fraud)

But what is the likelihood that risks occur?

Measuring and Managing the unknown…How do you deal with the unknown?

Risk is all about measuring uncertainty and the appetite that the bank has for that uncertainty

Question:– In a room, there are 1000 doors and only one is a trap from which you’ll never return again. You are

offered the chance to choose one door at the risk of not coming back out again. If you make it back, you will be rewarded with £10 million

– Would you take the offer? – What if it were £10?

– How would you predict that it will not rain tomorrow?

Trying to understand the unknown, e.g.:

What is the probability that a client will not repay the millions of dollars that they owe?

What is the probability that the Euro will decrease in value?

What is the probability that a customer defaults on a mortgage?

Core FunctionRisk is a core part of every bank that works closely on all deals and works in partnership with the business to make the decision whether or not a deal goes through.

RISK

Global Banking

Ensures risk on transactions is fully understood and measured and that we earn sufficient return

Work with bankers to ensure the deal is appropriately structured

Approves deals in partnership with the business

Manages the portfolio of deals, hedging risk

Capital Markets

Oversees the risk to which Citi is subject when taking a client public

Looks at the franchise risks Citi faces by making a deal with certain clients

Approves deals in partnership with the business

Consumer Bank

Makes decisions on whom we will lend money to and how we will do it

Looks after banking portfolios and ensures that Citi is ready to handle any economics that might change consumer behavior

Sales & Trading

Approves limits beyond which traders can’t take positions without approval

Ensures that if something big happens in the markets, Citi is protected

Skill Set for Risk Management

Strong team player

High level of self-motivation

Creative & Innovative

Natural communicator with strong relationship

building skills

Analytical

Skills

Commitment