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  • Writer's pictureWilliam Webster

Building society sourcebook - remedial action

Last year the FSA published the new sourcebook for building societies. There were 5 treasury approaches and 3 credit risk approaches. You compared what you did with what was expected and then waited. Now we are getting the response. In some cases I understand the FSA isn't too happy. That means remedial work. One key issue is the way that risk is managed (or not managed) in treasury. If you look at this from the FSA's perspective there isn't room for error. Either risk is managed or it is eliminated. This shouldn't be a surprise. It was flagged in the sourcebook. In July 2010 I mentioned that some societies would be required to engage in a programme to improve risk management. Let me put some flesh on this. Risk management is not about waiting and hoping. It is about being constructive in proofing your business against the possibility of excessive losses. It means identifying all the risks you face. That's more than market, credit, liquidity and operational exposures. It is how your business is affected by these risks. It requires you establish risk appetites. How much risk do you want to take with the risks you have identified? Express this qualitatively and quantitatively. Reference it to profitability and reserves. Risk reports should be concise. Add scenarios and stresses. They capture more extreme outcomes, the ones that really threaten continuity. Work out what your response would be. Make sure everyone knows what would happen. Limits should be clear. You should see what has happened and importantly what may happen. Use the risk reports to stimulate debate. Do you need to take further action as a result of what you see? Document the discussion. It's all good stuff. But there's just one problem. How do you do it? Yes it's a lot harder for societies. You can't throw unlimited resources at it. You certainly can't leave it to one person.  The FSA won't tell you what to do. But I can tell you what they are looking for. It's this. Independent risk management. This is where the whole board is actively engaged in risk management and takes expert guidance that is truly independent of those that procure risk. There are well known ways to do this. The poignant thing is it's easy to spot when it doesn't happen.

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