Enhancing Raiffeisen Bank International’s retail risk management infrastructure to help it achieve regulatory compliance, combined with the challenge of operating in 15 markets, is an ongoing priority for the Austria-based lender. Zsolt Jaczko, head of methodology and validation in retail risk management at Raiffeisen discusses the bank’s risk strategy with Douglas Blakey.
The second of the Basel Accords (Basel II), covering international standards that regulators use when determining how much capital lenders need to put aside to guard against risk, presented a small number of vendors with a commercial opportunity.
Under Basel II, lenders are required to meet the revised minimum capital requirements, comply with enhanced risk assessment and provide the market with details of their risk management activities in order to promote market discipline.
With retail business in 15 CEE markets, almost 60,000 employees, and more than 14 million customers served by a branch network of around 3,000 units, Raiffeisen Bank International’s partnership with a small number of vendors to achieve Basel II compliance was crucial.
Raiffeisen’s self-proclaimed mission was to “enable sustainable and profitable growth, effectively managing the retail portfolio and making sure that a suitable risk infrastructure is in place”.
AIRB approach better risk management
To accomplish that, the lender chose the Advanced Internal Rating Based Approach (AIRB) of the new Capital Accord (Basel) as the group level solution.
Given the greater risk sensitivity, the AIRB approach allowed the adoption of a more enhanced retail risk management framework, key to manage business challenges and make the most of group network opportunities.
Zsolt Jaczko, executive director at Raiffeisen Bank International, has led the bank’s efforts to implement a consistent risk management and Basel II framework across its entire retail network.
Jaczko told RBI that Raiffeisen has been working with Ireland-headquartered vendor Experian as its methodology partner since 2003, to meet the Basel II regulations.
“Experian had a wide range of knowledge and was selected to provide modelling across our network,” he said.
The first step was to develop a roadmap toward compliance together with state-of-the-art risk management across its entire banking network. Experian consultants carried out a Basel II gap analysis through site visits to all of the network units. Detailed data and process audits led to the design of the most suitable analytical framework and the identification of actions required to improve data standards where necessary.
This activity resulted in country specific roadmaps, defining activities and milestones and prioritising them (from data collection, through to scorecard development and risk-weighted assets calculation). Country level roadmaps converged them into the group level one that allowed the project teams to keep project oversight and control.
Raiffeisen summarised the benefits of the partnership as follows:
- Common minimum data infrastructure across the entire branch network;
- Continuous research and improvement of analytical tools for risk measurement and management;
- Enhanced risk assessment with the development and implementation of leading risk management solutions;
- Cross-selling and up-selling activities to increase portfolio size using newly developed tools;
- Consistent approach to reporting, operational processes and risk management across the network; and
- Trained staff through sessions on Basel II and specific risk management issues.
“Without effective risk management tools, the lending process is almost impossible,” said Jaczko. “If I do not have these tools I am not managing my lending, collection process and my portfolio; I am just lending and collecting. Without proper tools it is not feasible anymore.”
As for quantifying benefits from the bank’s risk investment, he said it was hard to quantify but in his last role, where he headed up risk at a smaller regional lender, one scorecard development could gain 20 or 30% for the profit and loss account.
Innovation in risk management
“After one or two years working with Experian, the strategy changed a little. It became apparent that it was not enough just to be compliant with the regulations.
“The decision was made that our strategy and organisation should focus not just on regulation, but to do something more, something much more innovative in terms of risk management.”
The partnership between lender and vendor evolved to encompass account level model development.
“It was an area where we felt we could do a lot more than just comply with the regulatory requirements. Moving to account-level estimation gives more accuracy.”
Another area of innovation related to low default portfolio estimation and the estimation of underlying risk.
“I have not seen it on the market elsewhere testing alternative approaches so comprehensively and we will issue the outcomes as a group standard.”
Innovation was also extended to real estate evaluation.
“By collecting all possible demographical information and real estate information, we can make much more accurate calculation of collateral.
“The value of loan collateral affects not just the P and L but also the bank’s capital requirements. It is a necessary tool in the markets where we have strong market share in the mortgage sector. It is based on predictive analytics and is a necessary approach.
The market is moving in this direction and I know of other lenders moving in the same way.”