FINANCIAL SYSTEM MELTDOW: Mitigating Strategies Lessons Learnt Future Policy Guidelines ENTERPRISE RISK MANAGEMENT FINANCIAL SYSTEM MELTDOWN: Mitigating Strategies Lessons Learnt Future Policy...

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FINANCIAL SYSTEM MELTDOW: Mitigating Strategies Lessons Learnt Future Policy Guidelines ENTERPRISE RISK MANAGEMENT FINANCIAL SYSTEM MELTDOWN: Mitigating Strategies Lessons Learnt Future Policy Guidelines Presentation by: Kwamina G. Acquah Dominic Owusu Sharon G. Dzirasah Benjamin Kwablah Samuel Afriyie George A. Bentum Brief Background Nature of Banks (UBBL in 2003) prior to the unprecedented crises Number of Banks prior to 2017 (Then in 2017, Collapse of UT and Capital Banks) Announcement and Road Map to New Minimum Capital Reserve (From GHS 120M to GHS 400 M) Consolidation of 5 more Banks (Sovereign, Construction, Beige, Royal and Unibank) in 2018 RISK MITIGATION STRATEGIES Governance Risk Board’s oversight over timely & material disclosure Appropriate Risk Management Frameworks – Approval Matrices Enforcing the “Fit & Proper” Qualification Competence and Integrity of Board Ensuring the independence of Critical Functions RISK MITIGATION STRATEGIES Credit Risk Well Equipped Staff – Fit & Proper Proper Credit Administration Systems Effective Monitoring Systems RISK MITIGATION STRATEGIES Liquidity Risk Monitor and control liquidity regularly Conduct schedule stress test Early identification of liquidity challenge Create a contingency plan RISK MITIGATION STRATEGIES Policy Risk Implementation of Effective Policies Monitoring and Sanctions Effective Internal Communication – New & Updated Processes RISK MITIGATION STRATEGIES The Regulator Implementation of Effective Policies Applying Sanctions Commensurate Offences Regular Monitoring LESSONS LEARNT Competence of the Board Board Acting in the Best Interest of the Banks Lending to Related Parties and matters arising More open academic and intellectual discourse on matters that confront the sector. It has become evident and imminent that going forward Regulator (BOG) needs to be more dynamic and keep up with the fast changing pace of the Industry. Regulator to Crack the whip where necessary. FUTURE POLICY QUIDELINES There’s the need for the banking sector to have strong internal controls to help deal with this issues before they get to out of hand, the internal auditors of the various banks should report directly to the Bank of Ghana instead of the board of the bank. The BOG must establish a deposit insurance scheme for the financial institutions. Ghana authorities must not provide guarantees and put the risk on market participants. Trust must be established between the government and the populace, which government will not allow financial institutions to fail or would make delivery on its commitments on banks, even in the collapse in cases of UT and Capital Bank. Ghana’s financial system large (banks) must provide a framework for the people to carry out economic transactions while adhering to monetary policies and regulations. This will help direct savings into investment ventures for Ghana’s economic growth.  Accountability of the Central Government to the people of Ghana through the Parliament. CONCLUSION In conclusion, the issues facing the Ghanaian financial system is not only disturbing the role of financial intermediation in the Ghanaian economy, but may to an extend weaken the efficacy of the existing monetary policies, aggravate economic depressions, cause capital and exchange rate burdens which we have seen recently where the Ghana Cedi is struggling to meet up with the US Dollar, Euro and the Pound Sterling. This has created huge fiscal costs linked to saving distressed financial institutions (DKM, Capital, UT Banks and the likes).   MILLIMAN WHITE PAPER Liquidity Risk Management: 1 June 2019 An area of increased focus for insurers Liquidity risk management: An area of increased focus for insurers Claire Booth, FIA, CERA Paul Fulcher, FIA Fred Vosvenieks, FIA, CERA Russell Ward, FIA Section 1: The liquidity risk challenge INTRODUCTION Life insurers focus much of their attention on managing the risks they are exposed to that might impact their available capital. This makes sense, as maintaining adequate capital is important for insurers to instil confidence with all stakeholders that they have sufficient funds to continue doing business and meet policyholder obligations. However, the fact that a firm holds adequate capital does not guarantee a position of adequate liquidity. In a similar way that an individual may be ‘asset rich’ (for example owning a valuable property) but ‘cash poor’ (not having any cash to spend right now), it is possible for an insurer to have an adequate solvency ratio and in spite of that run into problems from a liquidity perspective. It is therefore important for firms to consider and manage their risk exposures from a liquidity perspective and not just from a capital perspective. Managing liquidity requires a different approach from managing capital and must often be considered over different, typically much shorter, time horizons. It can also require a different toolbox of management actions to address stressed liquidity conditions compared to what a firm might use to address capital concerns. Despite the importance of effectively managing liquidity, guidance from insurance regulators in terms of their expectations of firms’ liquidity management is less developed than is the case for capital. However, the International Association of Insurance Supervisors (IAIS) produced guidance to group supervisors in 2014 on how they might assess liquidity for Global Systemically Important Insurers (G-SIIs).1 More recently, activity has increased and in November 2018, the IAIS issued a consultation on systemic risk that included a more detailed liquidity risk management framework.2 In addition, in March 2019, the Prudential Regulation Authority (PRA) in the UK issued a consultation paper (CP) on liquidity risk management for insurers.3 In this paper, we provide some context for a discussion of insurer liquidity risk, exploring sources of that risk and providing some examples of where it has challenged insurers in the past. We note that the incidence of major liquidity problems among insurers over recent history has been relatively low. However, as the standard investment warning goes—past performance is not necessarily a reliable guide to the future. In that vein, it is important to keep abreast of the liquidity implications of evolution in many facets of the environment in which insurers operate. For example: product mixes are changing as unit-linked offerings predominate, investment strategies are changing to target more exposure to illiquid assets, increasing use is being made of central clearing for derivatives and there are shifts in the liquidity characteristics themselves of the underlying asset markets. The marked increase recently in regulatory activity around liquidity risk indicates to us that these 'shifting sands' are very much on the radar of the IAIS and PRA. In the latter part of the paper we have laid out a description of a liquidity management framework (LMF), cognisant of the regulatory guidance, but in a form that appeals intuitively to us and provides a platform for expansion. In future papers we will look in more detail at individual areas. To illustrate how liquidity issues can affect an insurer, we consider the case of a US insurer, General American (“GA”), which experienced serious liquidity-driven problems in 1999.4 GA had significant exposure to short-term funding agreement contracts with institutional investors—deposit investment contracts used by US money market mutual funds. Many of these contracts had provisions whereby investors had the right to seek the return of their funds at any time with just seven days’ notice. The chain of events ultimately leading to GA’s demise was broadly as follows: ¡ The short-term funding agreement business written by GA was 50% reinsured to ARM Financial Group (ARM). Deteriorating financial strength led to a ratings downgrade for ARM. ¡ GA recaptured the reinsurance with ARM but suffered a ratings downgrade itself. ¡ Institutional clients became concerned and in August a number exercised their options to redeem funds. ¡ GA could not liquidate sufficient assets in the short time permitted by the contracts and found itself unable to meet the demands of its clients. ¡ GA was placed into 'administrative supervision' by the Missouri insurance regulator and was subsequently acquired by Met Life. 1 IAIS (22 October 2014). Guidance on Liquidity Management and Planning. Retrieved 26 June 2019 from https://www.iaisweb.org/file/47800/liquidity- guidance-final (PDF download). 2 IAIS (14 November 2018). Public Consultation Document: Holistic Framework for Systemic Risk in the Insurance Sector, Annex 2: Liquidity Risk Management (DRAFT). Retrieved 26 June 2019 from https://www.iaisweb.org/file/77862/holistic-framework-for-systemic-risk- consultation-document (PDF download). 3 PRA (March 2019). Consultation Paper 4/19 Liquidity Risk Management for Insurers. Retrieved 26 June 2019 from https://www.bankofengland.co.uk/- /media/boe/files/prudential-regulation/consultation-paper/2019/cp419.pdf. 4 General American: A Case Study in Liquidity Risk – Moody’s Investors Service, Liquidity Management for Life Insurers with Institutional Business - SOA. MILLIMAN WHITE PAPER Liquidity Risk Management: 2 June 2019 An area of increased focus for insurers There were a number of risk factors that contributed to the outcome: ¡ Very large exposure to a product embedding onerous contract terms on return of funds ¡ A concentrated client base of institutional investors ¡ Under-appreciation of the risk of the liquidity option and the extent to which its exercise might be correlated across the client base ¡ Use of a reinsurance partner with exposure to relatively illiquid assets ¡ The events occurred in the summer holiday period (August) when trading in the financial markets tends to be less active The GA story provides an illustration of a sort of 'butterfly effect,' with a chain of unanticipated events eventually causing the insurer’s downfall—in this case not due to issues of solvency but of liquidity. THE LIQUIDITY CHALLENGE When thinking about managing liquidity it can be helpful to visualise, at a high level, the system and the flows within it. Figure 1 provides a simplified illustration. The challenge faced by a firm is to maintain the available cash pool at such a level that allows the various claims on cash to be satisfied. If the level falls too low some claims will go unmet, for a period of time at least, and there will be negative consequences from this. On the other hand, if the firm is too cautious and the level is kept excessively high then cash demands may be very secure, but adverse consequences will arise in other ways via opportunity costs. The objective, therefore, is to determine an appropriate level for the firm, understand how that level may vary over time and as circumstances change and establish a framework within which actions are identified, prioritised and executed to keep the level in the right place. In particular, a firm needs
Answered Same DayJan 30, 2021

Answer To: FINANCIAL SYSTEM MELTDOW: Mitigating Strategies Lessons Learnt Future Policy Guidelines ENTERPRISE...

Parul answered on Jan 31 2021
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Purpose
The purpose of the risk management policy is to offer consultation about the financing of 400 million and how concentrating on tier-1 bank can be inadequate for the management. If the financing can be diversified i
n a way that many tier-1 banks, good credit ratings tier-2 banks and SME can help ensure the financial stability and sustainability (Alexander, M. W. E., Enoch, M. C., & Baliño, M. T. J., 1995).
Scope
This policy finds it application to the Central Bank of Ghana and activities of financing amount of 400 million. This will form the part of the Central Bank of Ghana's governance, framework as well as application of financing in near future (Acquah, G. K., Sharon, D., Dzirasah, G., Kwablah, B., Afriyie, S. and Bentum., G.)
Risk Governance
This offers a bird-eye view of the governance structure of the Central Bank of Ghana. The following structure provides you an overview of stakeholders that involved in the management of the risk and their accountability
· Board - Offers the foundation of the policies and procedures. They review the risk management and provides oversight
· Audit and Risk Committee – Foresee and regulate the risk management activities
· CEO or Chief Executive Officers - Drive the policy of diversification of the risk and culture of the management of risk. They also sign off on any annual risk attestations
· Managers - Consistently enhancing the risk management policy, strategy as well as supporting framework
· Employee and Contractors - Comply with the policies and procedures framed by board.
Risk Management Process
Overview of the process involved in the risk management. This refers to the process as well as practical guidance on the process. Establish the context of the financing, risk appetite, evaluation of risk and monitor the gaps (Ghana, E. P. A., 2009).
Essentially banks can mitigate their risk through interest earning business. By the virtue of loans and credit policy there is essence of interest that is primary source of earning for any banks (Barth, J. R., Caprio, G. J. & Levine, R., 2004). In order to ensure that the interest is not risky and treacherous, Bank of Ghana must place strict credit rating policies on all the Tier-1 Banks. After...
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