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GRC Professional : GRC Summer 2012
Australian banks’ balance sheets are on mortgages,” says Rabobank’s Yau. “If you have a crisis in mortgages or in property prices, banks would be struggling on profitability, which could in turn affect their capital and credit rating, which would lead to possible problems in raising funds and increase the cost of funds. It’s a spiral effect.” Speaking of raising funds, another risk on the horizon is the cost of funding. About 40% of funding for Australian banks comes from wholesale markets. In early December last year, ratings agency Standard & Poors downgraded Australia’s major banks (although they still remain among the handful of banks in the world to hold an AA rating). This is likely to make capital and liability raising more expensive as they go to international wholesale markets again this year. Mitigating actions The final stage of a stress test is to look at ways of mitigating the impact of external shocks on the bank. “It’s a very intensive debate within the different views,” says ING Direct’s Hellemans. “You have to at all times meet a number of board-defined and regulatory- defined numbers, including a buffer above the minimum. At the end of the day, you still have to show that you are a viable business.” Newton says the goal of stress testing is not just to check the bank’s capital requirements, but to determine the impact of shocks on the customer. “That’s what we’re trying to mimic: the customer’s fortunes, and from there what happens to us. We’re here for a reason as a bank. If you can’t relate it back to the customer, what’s the point?” Hellemans says it’s all about ensuring the bank can retain the customer’s trust. “‘Credit’ comes from the Latin credence which means ‘trust’,” he says. “Our first priority with everything is that we enable people to place their money with a bank. It’s about: ‘You give me your money, trust me, we will give it back to you’. We have to engender enough trust that we will pay it back irrespective of what happens on the lending side.” Challenges for 2012 In the year ahead, CROs and CFOs can expect increasing pressure to stress test banks as the fallout from the European debt crisis appears to be worsening. “If you sat down and said what would absolutely drive things nuts, the answer is: it’s a confluence of things,” says Newton. “We are in international market disruption. If you combine that with a significant decline in the growth in China, that confluence starts to scare me. What I would then do is to see how that would impact Australia. Would it impact employment levels? Interest rates? House prices and commercial asset prices? The real perfect storm would be to throw in a natural disaster or two.” ME Bank’s Mackenzie says it’s time for CROs and CFOs to step up. “I don’t want to say it’s a scary time, but it’s certainly a time for concern,” she says. “It feels like we’re on a big rollercoaster. This is really a time for CROs and CFOs to be joined at the hip. We have got to be working with the same set of assumptions. Collaboration is key.” Meanwhile, Hellemans is more optimistic. “I have been in banking for 34 years. This is not new ... these crises do come and go and the challenges are in many ways the same. Banking crises have happened a dime a dozen. For me, it’s a normal part of life. Stress testing is a tool that enables us to determine what, if and how prepared we are to deal with the consequences and ensure that we at all times maintain the trust of our customers.” Whatever happens, it’s clear that stress testing models will come under pressure. Get it wrong and the bank could find itself in a worst-case scenario without a handbook. ••• Career advice Want to end up as a CRO or CFO? Here’s what the experts say: Darryl Newton, CRO, Bank of Queensland “I will put in a plug for old blokes. For me, to be a good risk officer, you have to have a little bit of travel under your belt. The risk guy has got to be calm. The risk guy is there to go: “It ’s all right, this is the way it’s supposed to be under stress.” A little bit of mileage is a good thing.” George Yau, CFO, Rabobank “T he key thing is to be proactive in thinking ahead – making sure that what we do is staying focused and adding value to our key stakeholders. Don’t be afraid to sometimes work a bit harder.” Bart Hellemans, CRO, ING Direct “You have to have an understanding of how the organisation works, be it financial, operational, technical, from the very easy – understanding savings products – to the very complicated, such as structured derivatives.” Susan Mackenzie, CRO, ME Bank “By nature in risk and compliance, we tend to want to stay in our area of expertise. You have to push yourself. If it’s market risk, operational risk or credit risk where you haven’t spent time, go and spend time there.” This is really a time for CROs and CFOs to be joined at the hip. We have got to be working with the same set of assumptions.” Susan Mackenzie CRO, ME Bank 23
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