AIIB and risk

Se­cures triple-A credit rat­ings from 3 in­ter­na­tional credit rat­ing agen­cies

Banking Frontiers - - Housing Hihglights - Me­hul@bank­ingfron­tiers.com

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.”

REG­U­LA­TORY FRAME­WORK

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

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