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2020
ECONOMIC UPDATEByron Gangnes, Professor of Economics
University of Hawaii at Manoa
Learning Objectives:1. Review U.S. and global economic performance over the past year.2. Learn about key factors that will influence the economy, including labor market
health, the construction cycle, global conditions, and the evolution of economic policy.
3. Explore the likely path of the economy in 2020 and beyond.
Economic Update
Weighed down by Washington & World, US economy decelerates
Byron Gangnes Professor of Economics
Senior Research Fellow, UHERO University of Hawaii at Manoa
VLI January 2020 Island of Kauai
US expansion weaker, but not over
0
1
2
3
4
5
2015 III 2016 III 2017 III 2018 III 2019 II
Average since 2010
Year-on-year growth
Growth of US Real Gross Domestic Product
• Growth has abated after tax-cut induce pickup
• Trade wars and globe weigh on conditions and outlook
• Healthy consumers mean longest expansion not yet over
• When it comes, are we ready for the next recession?
Synchronized global slowing
• Broad-based weakness across all world regions • Trade war impacts on
business investment • Slack auto sales • Slowdown in China
• As a result, trade growth has ceased -2
-1
0
1
2
3
4
5
6
7
Jan-
18
Mar-1
8
May-1
8
Jul-1
8
Sep-
18
Nov-
18
Jan-
19
Mar-1
9
May-1
9
USA and CanadaEuro areaChinaEast Asia excl ChinaOther EMDEsUnited KingdomRest of world
Contributions to global import growthPercent
Source: IMF, World Economic Outlook, October 2019. Three-month moving average.
Dollar reversal also an export damper
• The dollar has risen over past two years – US still growth leader – Fed hiked alone – Safe haven aspect?
80
85
90
95
100
105
110
Jan-
2017
May-2
017
Sep-
2017
Jan-
2018
May-2
018
Sep-
2018
Jan-
2019
May-2
019
Sep-
2019
Oct-2
019
Euro Pound Ca$
Value of US DollarIndex
-16-12-8-4048
12
-40-30-20-10
0102030
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Manufacturing now in recessionGrowth in Durable Goods Orders
and Industrial ProductionPercent
Durable goods orders are 3-month moving average.
Percent
-1
0
1
2
3
4
5
2015
Q1
2015
Q3
2016
Q1
2016
Q3
2017
Q1
2017
Q3
2018
Q1
2018
Q3
2019
Q1
2019
Q3
Business Fixed InvestmentConsumer Spending
After tax cuts, investment had only a brief pickup
GDP Growth and Contributions to GrowthPercent CAR
-1
0
1
2
3
4
5
Luckily labor market is very healthy
• Unemployment is now lowest since 1960s
• Has led to decent, if unspectacular, income growth
• You have to look hard to find any sign of weakness
• Job openings down
And consumers are only a bit less confident
40
49
57
66
74
83
91
100
200720
0820
0920
1020
1120
1220
1320
1420
1520
1620
1720
1820
19
Dec-
19
University of Michigan Consumer Sentiment
• Confidence has fallen back only a bit. Still supporting: • Job security • Wage gains • Stock market gains • Home value gains
Four-month moving average.
So households can carry the ball (so far)
• Consumer spending has been rising at about 2.5% rate
Real Personal Consumption Spending
0%
1%
2%
3%
4%
Jan-
2017
Jul-2
017
Jan-
2018
Jul-2
018
Jan-
2019
Jul-2
019
Oct-2
019
Yr-on-yr Change
• Early take on holiday season is not promising • But November was a
short shopping month
Mortgage rates are down again
0
2
4
6
8
10
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
Nov-
2019
30-Year Mortgage Federal Funds
Percent
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Apr-1
6
Jul-1
6
Oct-1
6
Jan-
16
Apr-1
7
Jul-1
7
Oct-1
7
Jan-
18
Apr-1
8
Jul-1
8
Oct-1
8
Jan-
19
Apr-1
9
Jul-1
9
Oct-1
9
Giving a lift to housingPending Home Sales
(Year-on-year percent change, three-month moving average)
National Association of Realtors
Highest home building since 2007
0
750
1,500
2,250
3,000
1996
1997
1999
2000
2001
2003
2004
2005
2007
2008
2009
2011
2012
2013
2015
2016
2017
2019
0
750
1,500
2,250
3,000
1996
1997
1999
2000
2001
2003
2004
2005
2007
2008
2009
2011
2012
2013
2015
2016
2017
2019
Private Housing Units Authorized by PermitThousands*
* Seasonally adjusted annual rate
Inflation still falls short of Fed target
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
2015
Q1
2016
Q1
2017
Q1
2018
Q1
2019
Q1
2019
Q3
PCE Average
CPI PCE Deflator
Percent
Fed Target
Which lets the Fed wait and see
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2013
2014
2015
2016
2017
2018
2019
• After 9 increases that began in late-2015, Fed has made “insurance” cuts back to 1.5-1.75%
• Fed held steady in December • Has signaled no further rate
cuts in the near term, unless economic conditions worsen
Federal Funds RatePercent
Outlook: Synchronized weaknessGrowth of Real Gross Domestic Product
0
1
2
3
4
2014 2015 2016 2017 2018 2019 2020 2021
European Union United States Japan
Percent
Source: UHERO for US and Japan IMF for European Union (Europe 2018 is IMF estimate)
Slowing across developing world, tooGrowth of Real Gross Domestic Product
-4
-2
0
2
4
6
8
2014 2015 2016 2017 2018 2019 2020 2021
East and South Asia developingEmerging and developing EuropeLatin America and Caribbean
Percent
Source: International Monetary Fund, October 2019. 2018 are estimates.
What about recession risks?
• Usual excesses are not (much) in evidence
• Household debt burden is very low
• Corporate debt more of a concern
• Equity markets remain very pricey
• Synchronized global slowdowns are always dangerous
21%
26%
32%
37%
43%
48%
5%
8%
10%
13%
15%
1990
Q1
1993
Q2
1996
Q3
1999
Q4
2003
Q1
2006
Q2
2009
Q3
2012
Q4
2016
Q1
2019
Q2
Household and corporate debt burdens
Corp debt to GDP
Household debt service share
Upside potential?
• How could the forecast surprise to the upside? • Resolution of uncertainties over
• Trade • Politics
• More favorable financial conditions could boost investment more than expected
Are we ready for the next recession?
(Hint: Answer is no)
Federal revenues and outlays diverging again
15
20
25
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
201820
19
Percent of GDP
Outlays
Revenues
Budget deficit is strictly structural
Will fiscal support be likely?
Limited scope for rate cuts
0
1
2
3
4
5
6
200420
0520
0620
0720
0820
0920
1020
1120
1220
1320
1420
1520
1620
1720
1820
19
• Between July 2007 and the end of 2008, Fed cut rates more than 5 ppts
Federal Funds RatePercent
• Much less room to cut now
• nontraditional tools with less powerful effect
Prospects for growth remain good• 2019 may very well be the bottom of the global
growth slowdown • The “insurance cuts” cuts by the Fed and financial
market gains (both stock and bonds) will be a support • End to sources of drag will help: trade war, Brexit,
sliding corporate profits • But risks are bigger this year than last
• Pronounced global weakness • Political uncertainty
What does this mean for credit unions?
• Conditions favorable for credit union loans
• Household debt burdens low • Signs of stress in comm’l
bank personal loans • Income, interest rates favor
mortgage lending • Small spreads will continue to
challenge net revenues-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2002
2004
2006
2008
2010
2012
2014
2016
2018
PercentYield on 10-yr minus 2-year Treasury
1/17/2020
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Filename
BOARD OVERSIGHT OF DISRUPTIVE RISKS
James Lam, PresidentJames Lam & Associates, Inc.
Learning Objectives:1. Define the three major types of disruptive risks.2. Understand why they are so complex and difficult to deal with.3. Learn practice ways to incorporate disruptive risks into board risk oversight.
Filename
James LamPresidentph: [email protected] www.jameslam.com
Volunteer Leadership Institute
Board Oversight of Disruptive Risks
January 31, 2020
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Professional Biography
Corporate Director
• Director and Chair of the Risk Oversight Committee, E*TRADE• Director and Chair of the Audit Committee, RiskLens, Inc.• NACD D100 Honoree, Board Leadership Fellow, and Faculty
Management Consultant
• President, James Lam & Associates, Inc.• Former Partner, Oliver Wyman & Company
C-Suite Executive
• Former Chief Risk Officer, Fidelity Investments• Former Chief Risk Officer, GE Capital Market Services
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Founded in 2002, JLA is singularly focused on risk management
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ERM should be defined as a value-added function
Risk is a variable that can cause deviation from an expected outcome.
Enterprise risk management is an integrated and continuous process for managing enterprise-wide risks ‒ strategic, financial, operational, compliance, and reputational risks ‒ in order to minimize unexpected performance variance and maximize firm value.
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The evolution of ERM
Major Events and Risks Key Developments State of ERM
Phase OneEarly 1990s to mid 2000s
Phase TwoMid 2000s to present
Phase ThreeThe next 5-10 years
Derivatives losses (1994): Orange County, Procter & Gamble, Gibson Greetings
Rogue traders (1994-1995): Barings, Kidder, Daiwa
Accounting fraud (2000/2001): Enron, WorldCom, Tyco
Global financial crisis (2008): Lehman, Bear Sterns, AIG
Recent events: Oil price drop; China slowdown, negative interest rates; cyber-attacks
Cyber security “Internet of everything” Climate change Geo-political risks Global terrorism
Group of 30 Report Sarbanes-Oxley VaR models Real-time market risk
management Operational risk
management
Dodd-Frank Basel II; ORSA Stress-testing Scenario analysis Strategic risk management
Basel III and Basel IV Cybersecurity Disclosure Act Continuous ERM Collaborative reporting Evidence-based assurance
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ERM Framework and Processes
Risk AssessmentAnd Quantification
EnterpriseRisk
Management
Dashboard Reporting and Monitoring
Governance Structureand Policies
Risk Management
Who?
How?(ex-ante)
What?
How?(ex-post)
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ERM Components and Practices
Governance Structure and Policies
• Board-management governance structure and charters• Three lines of defense model• Risk appetite statement• Independent risk and compliance functions
Risk Assessment and Quantification
• Risk-control self assessments• Loss-event database• Key risk indicators• Value-at-risk, stress-testing and scenario analysis models
Risk Management • Risk acceptance, avoidance, mitigation, and risk transfer• Risk-based pricing• Capital allocation and risk/return optimization
Dashboard Reporting and Monitoring
• Intersection between strategy and ERM• Decision-based reporting• ERM performance feedback loop
Key components of an ERM program
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ERM Success Story: Recology
ERM Program For 2018, one of the top 5 annual goals for Recology’s CEO and Board of Directors was to implement a best-in-class ERM program.
Established board-level risk committee, executive ERM steering committee, and cross-functional ERM implementation teams.
Established ERM framework and roadmap, risk appetite statement, quarterly ERM report, earnings-at-risk analysis, risk culture survey, and loss-event database. Integrated ERM with strategic plan, M&A playbook, and cybersecurity.
Recently honored with the RIMS 2019 Global ERM Award of Distinction.
Company Profile Waste management company founded in 1920 Based in San Francisco; 3,800 employees Over $1 billion in revenue 100% employee-owned; ESOP structure Innovations in ESG: keeps 80% of waste out of
landfills; runs internationally known art program
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We live in an age of disruption
Increased Accountability (see Marchand and Clovis cases)
Growing Role in Strategy
New Areas of Oversight
Increased Time Commitment/Preparation
Business DisruptionsNow the Norm
Focus on Long-Term Value Creation
A New Mandate for BoardsThe Current Environment
Cyber Threats
New Technologies
Emerging Markets
Investor Activism
Advocacy Groups
Role of Business in Society
Changing business models
Disruptive Competition
Climate Change
Resource Scarcity
Global Regulatory Activism
Increased Media Focus
Speed of Innovation
Economic Volatility
Demographic Shifts
Political Polarization
Recycling
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NACD 2018 Blue Ribbon Commission Report: Board Oversight of Disruptive Risks
Disruptive risks defined:
• Risks that could have a major impact on a company’s: revenue profitability competitive position reputation
• They could be technology related or not
• They could be internal to the organization and/or threats that come from outside
• They can occur suddenly or over many years
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Recommendations of the 2018 NACD Blue Ribbon Commission
1. Develop a shared understanding of disruptive risks
2. Consider how to incorporate disruptive risks into the committee-levels and put into charter language
3. Ensure that the ERM processes are robust
4. Evaluate the culture of the board on dimensions such as level of openness of sharing concerns, acceptance of nontraditional points of view
5. CEO selection process should incorporate elements of disruptive risk
6. Talent strategy should incorporate elements of managing disruptive risks
7. Director re-nomination should not be a given
8. Board diversity is a strategic imperative not a compliance item
9. Incorporate ongoing learning into director evaluations
10. Ensure board level risk reports provide forward-looking information
11. Establish time on the board agenda for substantive discussions of disruptive risks
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Interesting data points on disruptive risks
Source: Report of the NACD Blue Ribbon Commission on Adaptive Governance: Board Oversight of Disruptive Risks (Arlington, VA: NACD 2018
82% confident with known risks
19% confident with atypical,disruptive risks
33years
(1964)
Average time spent on
500
93%OF LEADERS EXPECT GLOBAL CONFLICTS TO INCREASE
of the world’s data created in the last 2 years
22years
(2019)
12years
(2027)
Poll of directors62%
view disruptive risks as “much more important”
90%
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NETFLIX: The art of the strategic pivot
Market Shift - 1
Market Shift - 2
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NACD Directorship Cover Story
Source: Lam, James. January-February 2019 NACD Directorship Cover Story
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An animal kingdom of disruptive risks
Black Swans, or “Unknown
Unknowns”
Gray Rhinos, or “Known Unknowns”
White Elephants, or “Known Knowns”
Source: Lam, James. January-February 2019 NACD Directorship Cover Story
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Identifying and addressing black swans, gray rhinos, and white elephants
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Scenario Analysis: 7 Steps
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Dashboard reporting for disruptive risks
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Key takeaways for credit union directors
1. Define the roles of the full board and its standing committees regarding risk oversight
2. Deep dive on business strategy, key assumptions and risks, and defined risk appetite
3. Ensure the company’s enterprise risk management is effective, but also consider disruptive risks
4. Monitor the company’s culture and incentive structure
5. Work with management to define the right risk metrics and reporting for the board
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Final thought: a quote from my childhood hero Bruce Lee
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2020
INTELLIGENT AUTOMATION FOR CREDIT UNIONS
Jesse McGannon, Vice President Advisory ServicesStrategic Resource Management
Learning Objectives:1. Understand the value proposition of various intelligent automation technologies.2. Explore the top use cases for credit unions.3. Learn how these technologies can be implemented effectively based on the scale
of your organization.
Y O U ’ R E G O I N G T O N E E D A B I G G E R VA U LT
S T R A T E G I C R E S O U R C E M A N A G E M E N T
INTELLIGENT AUTOMATIONFOR CREDIT UNIONS
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S T R A T E G I C R E S O U R C E M A N A G E M E N T
Strategic Resource Management Established in 1992 Helps credit unions improve their performance through benchmarks, data,
strategy, and analytics $2.2 billion+ in implemented cost savings, revenue growth and efficiencies
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Jesse McGannon VP, Intelligent Automation 10+ years in financial services consulting
S T R A T E G I C R E S O U R C E M A N A G E M E N T
“You’re either the one that creates the automation or you’re the one getting automated.”
‐Tom Preston‐Werner, American Billionaire, Entrepreneur, GitHub Founder
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S T R A T E G I C R E S O U R C E M A N A G E M E N T 5
1900s Mechanical Computing Era
Physical devices assisted calculation organization tasks like recording population data and evaluating corporate financial performance. (Hollerith Tabulating Machine)
1950s Programming Era
2000s Cognitive Era
2020s AI Expansion Era
Programmable systems and the digital revolution made major advancements possible, like development of the internet and space exploration. Programmable systems continue to form the backbone of computing. (FORTRAN, Windows OS)
Machines became ever more capable of cognitive tasks due to development of computer systems inspired by the human brain, fuelled by ever‐growing compute capacity and data availability. (Watson, Level 2 Autonomous Vehicles, Google Duplex, GPT‐2)
Artificially Intelligent systems are increasingly able to perform tasks which were formerly the sole province of humans and will continue to grow.
Progression of Technological Intelligence
S T R A T E G I C R E S O U R C E M A N A G E M E N T 6
Mature
Emerging
RPA
Intelligent Automation
Narrow AI
General AI
Rules‐based Automation Text Analytics
Optical Character Recognition
Intelligent Word Recognition
Descriptive Analytics
Predictive Analytics
Prescriptive Analytics
Natural Language Processing
Machine Learning Enabled Analytics
Sentiment Analysis
Speech Recognition
Image Recognition
Computer Vision
Natural Language Generation
Generative Adversarial Networks
Digital Assistants
Intelligent Advisors Zero Knowledge Systems
SingularityAdaptive Knowledge Representation
Reasoning
Robotic Process Automation
Automates rules-based digital tasks
Intelligent Automation
Automates Digital Workflows
Narrow AI
Mimics Human Intelligence
General AI
Automates Human Intelligence
Artificial Intelligence Maturity Spectrum
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S T R A T E G I C R E S O U R C E M A N A G E M E N T 7
RPA is… RPA is not…
What RPA is good at
Moving files and folders
Scraping data from the web
Filling in forms
Reading and writing to databasesExtracting structured data from documents
Performing calculations
Connecting to system APIs
Following “if/then” decisions/rules
Logging into web/enterprise applications
Reading and sending email and attachments
Copying and pasting
Processing 24/7 to handle high volume
Computer-scripted software AI or virtual assistants (e.g. Alexa, Siri)
Capable of interacting at the UI layer or via APIs Tied to specialized physical machines (e.g. scanners)
Programs that replace or augment humans performing rules-based digital tasks
Capable of ‘learning’ new tasks outside the boundaries of its programming
Cross-functional and cross-application macros Walking, talking robots
Intelligent Automation: What it is, what it isn’t, and what it’s good at
S T R A T E G I C R E S O U R C E M A N A G E M E N T
Why Credit Unions Should Embrace Intelligent Automation
Improve the Member Experience
Reduce Costs Empower Your Staff
Reduce Risk
Greater than 80% of the time, our clients do not reduce headcount as a result of implementing IA
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Y O U ’ R E G O I N G T O N E E D A B I G G E R VA U LT
S T R A T E G I C R E S O U R C E M A N A G E M E N T
Credit Union Use Cases
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S T R A T E G I C R E S O U R C E M A N A G E M E N T
Credit Union Intelligent Automation Use Cases
• AI‐supported Loan Approvals
• Loan Origination and Onboarding
• Loan Processing/ Funding
• Loan Servicing
• Mortgage Defaults
• Remote Deposit Capture
• Wire Transfers
• Check Adjustment Processing
• Check Holds
• Change of Address
• Payment Processing
• Password Resets
• Data Entry across Applications
• Conversational AI
• New Account Opening
• Loan Application Processing
• Data Entry
• Reconciliations
• Wire Entry
• Employee Onboarding
• Employee Offboarding
• Accounts Payable
• OFAC Checking (e.g. Verifin)
LOAN/MORTGAGE OPERATIONS
DEPOSIT OPERATIONS
CONTACT CENTER BRANCH OTHERCH5
CH7
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Slide 10
CH5 Not sure if we should lead with this - it's not something we are likely able to deliver, and pretty much everyone has some level of auto-decisioning anyway. Even if we could do that kind of project it would likely be an incremental improvement rather than transformational.Connor Heaton, 11/20/2019
CH7 Slide would benefit from a couple callouts to focus attention, or maybe even killing everything but the categories and a few examples - big lists are best for appendixConnor Heaton, 11/20/2019
1/17/2020
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S T R A T E G I C R E S O U R C E M A N A G E M E N T
Conversational AI can simplify the member/user interaction
Simple
Example
Respond to questions like “What is the guest wifipassword” or “What is ourpolicy about accepting gifts”
Medium
Example
Tasks needing back and forth interaction – some integration with other systems – “reset my password” or “Update my tax withholdings”
Complex
Example
Complex tasks with businessprocess spanning multiple systems over a period –“Onboard a new employee” or “I need to apply for maternity leave”
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Y O U ’ R E G O I N G T O N E E D A B I G G E R VA U LT
S T R A T E G I C R E S O U R C E M A N A G E M E N T
So….Are we all going to be replaced by robots?
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S T R A T E G I C R E S O U R C E M A N A G E M E N T
Automation Potential and Impact
In Banking: “An estimated 200,000 U.S. banking jobs could be cut in the next 10 years and replaced by robots and other tech, according to a report by Wells Fargo analyst.”
Y O U ’ R E G O I N G T O N E E D A B I G G E R VA U LT
S T R A T E G I C R E S O U R C E M A N A G E M E N T
Questions?
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Y O U ’ R E G O I N G T O N E E D A B I G G E R VA U LT
S T R A T E G I C R E S O U R C E M A N A G E M E N T
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Thank You
Jesse McGannonVice President630‐302‐[email protected]
15
2020
BREAKOUT SESSION: THE GRAYING OF THE U.S.
ECONOMYByron Gangnes, Professor of Economics
University of Hawaii at Manoa
Learning Objectives:1. Review the demographic changes that are taking place in the U.S. economy.2. Learn about the ways in which population aging may affect the overall economy,
young and old generations, public finances, and our relationship with the rest of the world.
The graying of the US economy
Byron Gangnes Professor of Economics
Senior Research Fellow, UHERO University of Hawaii at Manoa
VLI January 2020 Island of Kauai
You and me are getting older
• No matter how much we kick and scream.
• How much are American demographics changing?
• What will this mean for the American economy?
• What might we do about it?
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You and me are getting older
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You and me are getting older
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2060
A global problem
•Globally, there are more adults over 65 than there are children under 5.
•By 2050, one out of every six people—1.6 billion—will be over the age of 65
•Some countries have it lots worse than we do•More on that later.
•Why has this happened?
UN Statistics and projections
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US fertility, once pretty good, has declinedFertility (birth per woman)
68
71
74
77
80
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US life expectancy has increased, but is now declining
Fertility (birth per woman) and Life Expectancy at Birth
Will be more old folks to take care of
We are in middle of exceptionally rapid increase as OADR doubles.
Population Aging, 1950-2015 and projected to 2100 (United Nations)
Source: Ronald Lee
The economic lifecycle
• People earn more than their consumption in middle ages
• And are net recipients of funds when young and old
• Some of these inward transfers are private (savings taking care of retirement, kids, parents)
• Some are public transfers
UHERO Dashboard Project, https://uhero.hawaii.edu/static/dashboard/nta.html
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Labor income and consumption by age
How might aging matter?
• Relatively smaller labor force lowers aggregate growth • Pressure on government finances
Lower growth speed limit
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1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s 2030s 2040s
"Productivity"
Labor Force
Nothing like starting out in a bad place
Fiscal challenges
Federal government debt is high and will grow
There are also about $5 trillion in unfunded state and local pension obligations.
$5-6 trillion in unfunded S&L pension liabilities
How might aging matter?
• Relatively smaller labor force lowers aggregate growth • Huge pressure on government finances • Possibly lower productivity growth
• Poorer average health • Bigger burden of social programs • Less scope for needed government investments
• How large are these effects likely to be? • One study finds about 0.2 ppts per year • Is that a little or a lot?
Is there anything good about aging?
• Wait, I’m thinking. • Well, OK: • Things not (well) captured by economic measures
• Favorable environmental effects • Longer periods of enjoyed life
• Possible favorable effects on productivity • Fewer children mean higher education spending on each • Greater saving from large middle age fuels investment • Do older workers retain useful knowledge and work
skills?
What can be done?
• No brainers • Gradually extend official retirement age • Provide other incentives to keep working • Provide better support for working parents • Encourage saving to increase private pensions
• More controversial or a lot harder • Raise social security and medicare taxes • Reduce social security benefits • Get a handle on health care costs • Means test public retirement benefits • Maintain a fairly open door immigration
policy
Effects in Japan of gradually extending retirement age
Labor income
Gov’t benefits received
Taxes paid
Immigration helps• Foreign born share of pop has been rising since 1970.
It could be worse: Korea
Source: Statistica
It could be worse: China 1st to be “old before rich”
US Aging scorecard
Source: Andrew Mason
Positive Negative
Demography Fertility is only moderately low
Laggard in raising life expectancy
Labor markets Flexible; strong incentives to work in old-age
Anti-immigrant sentiment
Consumption High old-age consumption because of health care
Productivity Heavy emphasis on funded approaches to old-age needs
Spending on children inadequately
Economic security Sustainable with right policies
Inequality due to differential mortality
Generational balance Moderate transfer programs reduce burden on future generations
High and rising public debt, unfunded liabilities at state, local levels
Credit union take-aways
• Household formation will be smaller • Will there be a dearth of new home buyers?
• Your clientele will be older • Will they be less credit-worthy? • Will that increase the demand for non-
traditional financial products? • Lower aggregate growth will mean lower
interest rates, probably spreads • Remember, these are very long-term changes
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Filename
BREAKOUT SESSION: GETTING THE RIGHT RISK METRICS AND REPORTING
FOR THE BOARDJames Lam, President
James Lam & Associates, Inc.
Learning Objectives:1. Review best practices in board risk reporting.2. Discuss key risk indicators, including challenging areas such as cyber and
culture.3. Understand the structure and content of an effective board risk report.
Filename
James LamPresidentph: [email protected] www.jameslam.com
Volunteer Leadership Institute
Getting the Right Risk Metrics and Reporting for the Board
January 31, 2020
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Why the right risk metrics and reporting is important to credit union directors
1. It has often been said “what get measured gets managed”
2. Risk oversight is one of the most important fiduciary responsibilities for directors (see Marchand and Clovis cases)
3. The quality (not quantity) of information is a key driver of the quality of board discussions and oversight
4. A recent McKinsey study indicated that 70% of board time is focused on backward-looking information
5. Getting the right risk metrics and reporting to the Board should be a collaborative effort between management and the Board
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Risk is a bell curve!
Upside RiskDownside Risk Expected Performance
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Risks come in different shapes and sizes
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Risk management is about optimizing the bell curve
3. Manage the upside• Business plan
execution • Strategic growth
& innovation• Capital allocation
2. Manage the expected• Risk acceptance/ avoidance • Pricing for the cost of risk
1. Manage the downside• Risk mitigation • Risk transfer • Risk appetite • Capital adequacy
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Risk assessments and heat maps are not actionable
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Worst CasePerformance
ExpectedPerformance
Distribution of Outcomes
Integrating Strategy and ERM
1. Define business strategy and objectives
2. Establish KPIs based on expected performance (vs. management targets)
3. Identify risks that can drive variability in performance
4. Establish KRIs for critical risks (vs. risk appetite)
5. Provide integrated monitoring and management
Linking business objectives and key performance and risk indicators
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Fitness example
Integrating Strategy and ERM
1. Maintain good fitness
2. KPI: BMI between 18.5 and 24.9
3. Risk: lack of exercise
4. KRI: workout 4-5 times per week for a minimum of 30 minutes each session
5. Work with a personal trainer twice a week; monitor KPI and KRI trends
Worst CasePerformance
ExpectedPerformance
Distribution of Outcomes
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Human resources example
Integrating Strategy and ERM
1. Be the employer of choice
2. KPI: turnover rate of high performing employees under 10% per annum
3. Risk: lack of professional development
4. KRI: % of managerial jobs filled by internal candidates over 65%
5. Develop job training and rotation program; monitor KPI and KRI trends
Worst CasePerformance
ExpectedPerformance
Distribution of Outcomes
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Interest rate risk example
Integrating Strategy and ERM
1. Maintain a stable net interest margin
2. KPI: net interest margin between 2.5% and 3.0%
3. Risk: changes in the shape and level of the yield curve
4. KRI: % earnings-at-risk to a 100bp rate change under 10%
5. Implement hedging program and monitor KPI and KRI trends
Worst CasePerformance
ExpectedPerformance
Distribution of Outcomes
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Quantifying cyber risk to enhance board oversight
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Risk drivers for market, credit, and cyber risk
Component Market Risk Credit Risk Cyber Risk
Exposure Investment portfolio Loan portfolio Digital assets portfolio; corporate brand & reputation
Probability Probability of loss or gain Market price
volatility
Probability of default Economic
conditions Credit ratings
Probability of breach Threat vectors Preventative controls
Severity Holding period Market liquidity
of investments
Loss in the event of default Collateral rights Bankruptcy rights
Loss in the event of breach Dwell time Resolution time Detective, mitigation, and
proactive controls
Correlation Price correlations Asset allocation Position
concentrations
Default correlations Loan
concentrations Country/industry
diversification
Threat/control correlations Cyber attack patterns Central points of failure: IT
infrastructure, supply chain
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Example of a cyber risk appetite statement and metrics
Our risk appetite for cyber risk is low. While cyber risk cannot be completely eliminated, we seek to mitigate our risk profile by continuously identify potential threats and vulnerabilities; proactively implement strategies designed to prevent, detect, and respond to cyber threats; minimize third-party related vulnerabilities and cyber security threats; allow only limited and appropriate access to systems and data; and conduct table-top exercises to ensure that risk mitigation and communication plans are effective.
Our risk appetite metrics and tolerances include:• Time to detect a breach under 30 days• Phishing failure rate under 5%• Cyber VaR under 5% of revenue• BitSight security rating of at least 760 and above peer group average• NIST tiers of 3-4 on all critical policies and practices
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Example: cybersecurity metrics
4. Risk Quantification• Value of digital assets, including “crown jewels”• Probability of breach• Potential loss magnitude (cyber VaR)• Potential strategic and reputational impact• Costs of the cybersecurity program• Costs of regulatory compliance (e.g. GDPR)• Costs of cyber insurance
5. Oversight of Business Decisions • Risk-adjusted profitability of digital businesses
and strategies• Staffing and resource management• Return on investment of existing and new
cybersecurity controls• Cyber insurance versus self-insurance
1. Threat Environment• Global trends in cyber crime costs, data
losses, ransomware• NH-ISAC Cyber Threat Trend• Reported attacks and breaches • Dark web chatter and activity
2. Security Assessment (Outside-In)• Company security rating • Security ratings of critical 3rd parties• Independent security assessments and
Pentest results
3. Security Assessment (Inside-Out)• NIST-based program maturity• Basic hygiene metrics• Percentage of critical systems downtime
and time to recover • Mean time to detect and remediate cyber
breaches
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Seven attributes of highly effective KPIs and KRIs
1. Objective measurement of business performance and material risks
2. Linked to key objectives and specific accountabilities
3. Balance of leading and lagging indicators
4. Actionable: useful metrics support decisions and strategies
5. Relative performance that can be benchmarked internally or externally
6. KPIs measured against targets; KRIs measured against risk appetite
7. Provide measurement of risk-adjusted return
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RAROC, a classic return on risk measurement
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Inverted yield curve: an early-warning indicator for recessions
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Some of my favorite* risk metrics
Operational Risk Metrics
• Operational risk losses to revenue ratio*• Retention rate of high-potential employees• Number of high-risk third-party vendors• Recovery time of critical-system failures
Legal, Regulatory, and Compliance Metrics
• Active and overdue regulatory matters• Total legal and compliance cost*• Number of ethical and policy violations
Reputational Risk Metrics
• Stock performance relative to peers• Customer experience• Risk culture survey results*• Glassdoor reputational scores• Negative headlines and media mentions
Early-Warning Indicators
• Inverted yield curve• Actual and implied price volatility• Capital markets price correlations*
Strategic Risk Metrics
• Unexpected earnings variance• Diversification benefit• RAROC vs. Ke*• Capital formation and value creation
of innovative start-up companies
Financial Risk Metrics
• Income sensitivity and duration of equity*
• Credit concentration metrics• Liquidity coverage ratios
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Key ERM priorities as new E*TRADE Risk Oversight Committee Chairman
1. Establish a strong ERM agenda for the Risk Oversight Committee (ROC) Calendar to cover key risks, regulatory requirements, and ERM roadmap Board risk oversight beyond financial and regulatory risks to focus on strategic and
operational risks, as well as risk culture
2. Strengthen independent risk oversight by formalizing the reporting relationships between the ROC and the Chief Risk Officer and Chief Compliance Officer
3. Enhance the process to review and approve risk policies, with a focus on the Risk Appetite Statement
4. Improve the quality and effectiveness of risk reports that go to the Board
5. Establish an ERM performance feedback loop by linking ex-ante earnings-at-risk analysis and ex-post earnings attribution analysis
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CRO Report to the Risk Oversight Committee
Executive Summary
New Losses & Events
Follow-up on Prior Losses & Events
Emerging Risks
Key Risk Reviews and Metrics vs. Risk Tolerances
Progress against the ERM Roadmap
Terms and Definitions
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How do you know if your ERM program is working effectively?
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The objective of ERM is to minimize unexpected earnings variance
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Key takeaways for credit union directors
1. Remember risk is a bell curve!
2. Don’t rely on qualitative risk assessments and heat maps
3. Link business objectives → KPIs → risks → KRIs → integrated monitoring and management
4. Establish risk appetite statements and tolerance levels for critical risks (e.g., cybersecurity)
5. Work with management to define the right risk metrics and reporting for the board. Consider unexpected earnings variance as a feedback loop for ERM
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