Risk governance and culture

A mid-sized bank loses US$400m on a concentrated commodities position. The internal review finds that:

• The desk's VaR model was validated last year and its estimates were reasonable.
• The desk breached its limits 12 times in six months; each time its head of business approved a temporary excess, with no deadline.
• Market risk reported every breach in a monthly pack, but never escalated beyond it.
• Internal audit had rated escalation “needs improvement” a year earlier; the finding was still open.

At a Hong Kong-listed insurer, the Chief Risk Officer reports to the CFO and is paid partly from the investment division's results. She blocks a large private credit investment that would breach the board's concentration limit. A month later the CEO tells the board he plans to replace her “to bring in a more commercial mindset”.

A Nordic bank has €120bn of risk-weighted assets and €15.6bn of CET1 capital. Its risk appetite statement sets an early warning at a CET1 ratio of 12.0% and a limit at 11.0%. Its severe stress scenario has a CET1 loss of €2.0bn and a 5% rise in risk-weighted assets.

An FX desk in Singapore has a 1-day 99% VaR limit of US$25m. Its VaR is US$21m on Monday, US$26.5m on Tuesday after a central bank surprise, and US$28.5m on Wednesday, with no new trades. Use the escalation ladder from L2.3.06: Limits and escalation: 80% early warning, above 100% breach, above 110% (or more than three days in breach) to the CRO, above 125% to the CEO and board risk committee.

A managing director was awarded a bonus of US$2,400,000: 50% paid at once, the rest in equal slices at the end of each of the next 4 years. 3 years later, the bank finds that her business booked revenue on trades that breached client suitability rules. The committee decides to cancel everything it still can and to claw back 25% of what has been paid.

A consumer lender in Australia pays branch staff a bonus per add-on insurance policy sold with each loan. Sales of the add-on have tripled in a year. Complaints are rising, and a third of the sales were approved as exceptions to the product's eligibility policy. The head of sales says the exceptions were “signed off properly”. The board has seen only the sales figures.

A UK customer was mis-sold PPI and paid £180 at the start of each of four years. The complaint is settled 9, 8, 7, 6 years after the four payments respectively. Redress is the premiums plus simple interest at 8% a year from each payment to settlement.