AIIB and risk
Secures triple-A credit ratings from 3 international credit rating agencies
The Asian Infrastructure Investment Bank (AIIB), a multilateral development bank, headquartered in Beijing, with a mission to improve social and economic outcomes in Asia, held its 3rd Annual Meeting in Mumbai recently.
AIIB’s risk management architecture continues to develop. In 2017 it built upon and expanded the risk management capabilities and further strengthened its core financial systems. It also formulated its risk appetite statement, the cornerstone for the management of risk at the institution.
Laurel Ostfield, head of Communications and Development at AIIB, says in 2016, the development bank put in place the foundation of its Risk Management Framework (RMF), including the adoption of economic capital as its currency of risk throughout its operations. “The risk governance practices, comprehensive risk limit policies and operational risk rules of the bank are in line with best practice of modern financial institutions. Besides managing its financial risks, AIIB places particular emphasis on non-financial risks including operational, integrity, environmental, social and other reputational risks. The RMF provides an overview of AIIB’s approach to risk management,” says he.
The results of these efforts were seen in 2017 when it secured short-term and long-term triple-A credit ratings from 3 international credit rating agencies - Standard & Poor’s Global Ratings, Moody’s Investors Service and Fitch Ratings. These systems will be increasingly important as AIIB’s volume of business grows. It has formulated a comprehensive rating methodology and conducted necessary training.
The bank has a well-developed risk management strategy that enables it to identify, respond to, escalate, manage and monitor risks. The rollout of RMF is aimed at enhancing and developing its capacities in the policy, methodology and modeling areas, which is an institutional priority. It helps its executives to improve the control and coordination of risk-taking across the organization while maintaining its independence in analytical and objective decision making. The Audit and Risk Committee assesses financial statements, reporting practices, procedures and issues and reviews reports from the external auditors. It also reviews the effectiveness of the internal audit function. It held its inaugural meeting in May and another 2 meetings in September and December in 2017.
Martin Kimmig, chief risk officer, ensures stability and financial continuity, oversees capital allocation and utilization, manages financial and nonfinancial risks (including reputational consequences). He spent 24 years at the World Bank Group.
IT: NO LEGACY SYSTEMS
The first phase of the bank’s IT strategy ended in 2017 and the second phase has just begun. Several initiatives have been undertaken during the second phase, including the redesign and launch of internal systems and the deployment of IT tools for staff.
Luky Eko Wuryanto, chief administration officer, a PhD in regional science, oversees information technology and administration services. The board of directors of the bank holds physical meetings and also through videoconference. There were 7 meetings in 2017, including 3 virtual meetings. The board has been getting real-time.
Explains Laurel: “In terms of technology, we are still in the process of setting up our IT systems. Being new, we have the benefit of no legacy systems, which means we can go straight to using modern approaches, such as cloud and mobile right from the word go. It will take time for all of our systems to be fully implemented, but we are making progress. We are active in the social channels that are most relevant to our stakeholders.”
The bank’s Compliance, Effectiveness and Integrity Unit (CEIU), headed by Hamid Sharif, managing director, reports directly to the board and has an oversight role to help strengthen its accountability, learning and effectiveness related to investment operations. It is the focal point for projectrelated grievances and develops policies and practices to bolster the integrity of activities being financed. It has institutionalized measures to protect whistleblowers who report fraud and corruption. The bank also listens and responds to its external stakeholders through public interaction and sharing of information.
Laurel talks about the regulation: “Some Asian countries have successfully created a stable political and regulatory environment to encourage private investment. This is critical. There also must be better standardization of policy and regulatory frameworks across borders to facilitate enhanced trade and connectivity. A train or highway that connects two countries will lose much of its value if goods and people cannot smoothly cross the border. This is the soft side of infrastructure that requires coordination and collaboration between governments.”
Laurel Ostfield is confident that the bank can go straight to using modern approaches, such as cloud and mobile right from the word go