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Private Banking

Risk Management Practices in Retail and Private Banking
A Three Days Course for Industry Practitioners

Day One

Managing Retail Franchises in Highly Competitive Environments and Measuring/ Managing the Associated Risks

Branch vs. Branchless Banking – getting value for investments in francises

  • Measuring franchise value in fragmented retail markets
  • Managing risks through the business cycle
    • Investment at Risk
    • Customer Volatility
    • Product Coverage and Margin Volatility
    • Cash Flow at Risk

Overview of Retail Banking Business Models and inherent Risks for Banks

  • Customer Servicing Business Models – lessons from the past
  • Franchise Resiliency and Customer Price Elasticities
  • Modeling Behavioral Volatilities (Quantities, Unit Prices, Margins)
  • The Paradigm of achieving homogeneity through large, mixed franchises
  • Case Study on Size Optimality

The Liability Side

  • Term Deposits and Saving Accounts
  • The Fable of “Cheap Funding” via retail deposits
  • Non Maturing Liabilities – Risks
    • Customer Replication Dynamics
    • Margin volatility – no competition
    • Margin volatility – with competition


The Asset Side

  • Credit Cards
  • Consumer Loans
    • Non Collateralized
    • Collateralized
  • Mortgages
    • Single Dwelling Units
    • Multiple Dwelling Units
  • Customer Tailored Mortgage Products – Risk Identification
  • Non Maturing Assets – Portfolio Replication Techniques
    • Margin stability vs. optimizing Profits
    • Modeling Volume Variation
    • Liquidity Constraints
  • Risks of the Originate to Distribute Model
    • Lessons from the Credit Crunch

Transfer Pricing Issues

  • Risks associated with the Market Rate Models
  • Risks associated with the Time Lag Models
  • Case Studies on Transfer Pricing Risks

Risks inherent in using Customer Rating Models

  • Model risk
  • Customer Dynamics under Economic Uncertainty
  • Risks associated with de-coupling the asset and liability sides when employing scoring models

Credit Risk Management in Retail Banking

  • Measuring the Effects of Diversification
  • The leptokurtotic effects of defaults in volatile business cycles
  • Concentration Risks
  • Risk Mitigation and “the Risks of Risk Mitigation”
    • Securitization of Assets
    • Replicating Portfolios and Hedging

Risks associated with “Advisory Businesses”

  • Legal & Operational Risks of Retail Securities Brokerage
  • Impacts on Financing Businesses

Managing Customer Margin Volatility

  • Measuring the Benefits of Diversification
  • Managing Optimal Customer Products/ Services Pallet

Best Practices in various geographies

Day Two

Managing Risks in Wealth Management Businesses

Key Success Factors in Managing Profitable Private Banking Businesses

  • Performance of Managed Customer Accounts & Impact of Performance Volatility
  • Case Study of Performance Enhancing Techniques in Competitive Environments
  • Changes in Customer Elasticities to Performance Track Records
    • A Historical Perspective
    • Objective vs. “Emotional” Customer Behavior

Measuring and Managing “Fee Income at Risk” in Private Banking

  • Determining Key Factors Impacting Fee Income
  • Modeling Fee Income in Private Banking
  • Aligning Fee Income volatility to Key Factors
    • Exogenous
    • Endogenous / Idiosyncratic


Risks of Collateralized Lending to High Net Worth Individuals

  • Haircuts Management in competitive Lending Environments
  • Measuring & Managing Collateral Volatility
    • Liquidity concerns
    • Reposession concerns
  • Measuring Dependencies of Fee Businesses and Collateral Lending
    • Testing Assumptions on Elasticities to macroeconomic factors
    • Dependencies between Default Probabilities and Collateral Market Values
    • Case Study on establishing Haircuts
  • Constraints imposed by Market Practices
    • Periodical Margining
    • Marking collateral to Market
    • Securitizing / Syndicating Collateralized Loans: „Right Way Trades“, “Wrong Way Trades”
  • Costs associated with collateral Liquidation - Case Studies
    • Aircraft / Yacht
    • Securities Portfolio
  • Legal Constraints

Measuring Profitability and Effectiveness of Private Banking Practices

  • Attaching a Value to Franchises – Case Study: Swiss Bank
  • Determining appopriate Benchmarks under opaque Information
  • Determining Measurement Factors:
    • Short Term vs. Long Term
    • Size of Portfolio under Management
    • Pallet of Bundled Services– Added Value - Case Study of “Platinum Credit Card”, Case Study of “Free Current Account”
  • Industry Best Practices
Day Three

Operational Risks in Retail and Private Banking

Key Risk Drivers

  • Why are Private Banking Operations Riskier than Retail Banking?
  • Case Study on Identifying appropriate Operational Risk Drivers

Cost/ Benefit Analysis of Operational Risks Management

  • Retail
  • Wealth Management

Investing in Early Warning Systems – a Cost / Benefit Taxonomy

  • Retail Banking & other homogenous large scale operations
  • Wealth Management


Risk Adjusted Performance Measurement of Retail / Private Banking Businesses

  • Why is Return on Op Risk VAR meaningless?
  • The Traps in using RAROC as a Performance Measurement Indicator
  • Alternative Measures
  • Industry Benchmark Studies

Audit Reports as Value Enhancement Tools

  • Proactive vs. Reactive Auditing – Case Study: German Bank
  • The Art of cataloguing Audit Reports
  • Deriving Value from Qualitative Audits – Case Study

Conclusion & Discussion