Economy & Finance

.credit-suisse Annual Report Part 4 Risk management

1. ANNUAL REPORT 2000/2001 PART IV CREDIT SUISSE GROUP RISK MANAGEMENT 2. PART I 2 Financial highlights 2000 4 To our shareholders PART II 6 An overview of Credit Suisse…
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  • 2. PART I 2 Financial highlights 2000 4 To our shareholders PART II 6 An overview of Credit Suisse Group 6 Organisation 8 Financial review 11 Strategic review PART III 13 Review of business units 16 Credit Suisse Financial Services 23 Credit Suisse Private Banking 25 Credit Suisse Asset Management 27 Credit Suisse First Boston PART IV 30 Credit Suisse Group Risk Management PART V 50 Consolidated financial statements PART VI 107 Parent company financial statements 118 Five-year summary of selected financial data 120 Management 126 Main offices 127 Information for investors
  • 3. CREDIT SUISSE GROUP RISK MANAGEMENT Introduction rather their diligent implementation: Financial services – put in a simplified implementation is what makes a com- framework – consist of four basic pany stand out and determines its elements: information, transactions, success or failure. While risk manage- capital and risk. ment will never be “finished” in a com- Nowadays, information is instantly plex and evolving financial environ- Hans-Ulrich Doerig available, ubiquitous and increasingly ment, we aim to institutionalise learn- Vice-Chairman of the cheap. Simply owning information is ing and stay at the edge of “best Executive Board and not enough – only by packaging and practice”. Group Chief Risk Officer interpreting it intelligently and provid- At Credit Suisse Group, we differ- ing value-enhancing advice and deci- entiate between eight tiers of risk tak- sion-making support can a company ing, approval and control: Credit Suisse Group, including its differentiate itself from the competi- business units, pursues a disciplined, tion. Tier 1: Business unit front line with comprehensive and integrated The volume of transactions has prime responsibility for taking and approach to risk management. Signifi- grown dramatically in recent years managing risks. cant personnel and technological around the globe. New technologies resources are focused on ensuring are expanding rapidly, making it even Tier 2: Independent business unit that Credit Suisse Group remains a more important that in-house and support and approval functions includ- leader in risk management. By means out-sourced processes are cost ing product control, strategic risk man- of a proactive risk management effective. agement, counterparty analysis and culture and the appropriate qualitative On today’s open, deregulated cap- approval, legal and compliance with and quantitative tools, the Group aims ital markets, basic access to capital is focus on specific risk areas – all inde- to minimise the potential for unde- no longer an issue for well-run estab- pendent from front line. sired risk exposures and to optimise lished companies. The challenge is to the allocation of capital throughout allocate capital optimally to the differ- Tier 3: Group functions such as over- the Group to the benefit of share- ent activities within the organisation. all risk management, control and chal- holders and other stakeholders. Risk is uncertainty about a future lenging the business units. outcome. It is the essence of financial institutions’ activities. Risk is multifac- Tier 4: Senior management at busi- eted, complex, often interlinked and/or ness unit and group level as well as context-driven. While not avoidable, supervisory boards with focus on the risk is to be managed, not feared. overall risk profile. Intelligent, informed risk taking is the key. Risk is not only about “downside” Tier 5: Independent internal and ex- and threats, but also about chances ternal audit with focus on assessments and opportunities. Taking no risks is and deficiencies. potentially the approach which pres- ents the highest risk. Tier 6: Rating agencies – comparison Good risk management has with competitors. become a decisive competitive advan- tage. It helps to maintain stability and Tier 7: Regulators – supervisors with continuity and supports revenue and the role of an “external referee”. earnings growth. Disciplined and intel- ligent risk taking is an “attitude” Tier 8: Shareholders and other stake- towards stakeholders. holders as ultimate overall and daily Our research and observations in judges. the financial services industry have led to the “12 organisational principles in risk management” which serve as our general framework in risk manage- ment (see chart on page 32). To apply these primarily organisational princi- ples, consistently and globally is our continuous aim. The basis is not the intellectual level of the principles, but 30
  • 4. Risk management framework come of the mix of doing the right plined culture by promoting integrity The Group has established a frame- thing and doing things right over an and high ethical standards, clear lines work allowing comprehensive and extended period. Strategy and of responsibility and accountability, effective risk control. The chart below reputation/brand risks can be made segregation of duties, appropriate entitled “Risk Management Frame- transparent with methods like relative supervision by senior management, work” illustrates the three main ele- stock performance, relative stock price and strong control systems. ments of Credit Suisse Group’s frame- over book value, relative price earnings The Group’s monitoring systems work. The underlying external and ratio, return on equity, net increase are based on a comprehensive set of internal factors shaping the risk dispo- of number of clients or assets internal controls, with activities such sition of the firm are shown on the left under management, attracting and as approvals, authorisations, compli- of the graph. Then – based on the 12 keeping good staff and rankings of ance checks, and follow-ups on non- core principles of good management – all sorts. compliance clearly defined at every shown in the middle of the graph – the level of business. Internal and exter- risk management organisation and risk Risk culture nal auditors are recognised by the culture were established. Maintaining a Risk management is a multi-faceted Board as critically important agents, firmwide risk management process process that extends well beyond an providing an independent check on providing effective control over the organisation’s formal risk management the information received from line major risks must be the ultimate goal. structure, its standards, processes, management. The chief auditor Given its strategy, Credit Suisse methodologies and tools. The reports directly to the Chairman and Group differentiates among seven mathematical/statistical quantification regularly communicates to the Board priority risk categories as shown on the of risks and consequent setting of of Directors’ Audit Committee. Issues right of the graph: market, credit, appropriate, common sense limits raised by the internal and external insurance underwriting, commission represents only part of the integrated auditors are tracked systematically and fee income and some operational approach to risk management. While and addressed comprehensively. risks are already quantifiable or are Credit Suisse Group aims to stay in Group risk management represents increasingly becoming so. the forefront of any relevant, credible an additional layer of risk manage- Strategy risk deals with the exist- and cost-effective quantification of ment and control, challenging the ing base of an institution and its risk, successful risk management is approach of the business units where options, based on a what-if analysis. much more than producing a “risk or appropriate and relevant in the overall Strategy is doing the right thing at the model figure”. The development and context. As an example, the Group right time, and must be properly imple- maintenance of an appropriate risk and control system requires the follow-up mented. This is an issue for all other control culture is at least as important on serious deficiencies not only by the S's of an organisation, especially their as the most sophisticated quantitative business unit, but also by Group man- synchronisation. Reputation risk is the risk models. agement. aggregation of the outcome of all risks A key factor in risk management If a financial services group is plus other internal and external factors is discipline, including discipline as to to achieve sustained success, confi- based on facts, perceptions and compliance requirements. Credit dence and trust built over the years expectations. Reputation is the out- Suisse Group encourages a disci- are vital. An excellent reputation is Credit Suisse Group’s risk management framework Major factors shaping the risk Scope and challenge of an Effective risk management disposition of an individual and integrated firmwide provides focus on and control an organisation risk management over 7 major risks Values, society Inn & politics Building on the organisation’s 12 S: ov a · Strategy · Stakeholders ion Fa cts Strategy risk tion E xp · Structure · Shared values etit ion e & te · System/s · Skills mp ct a pt chn · Simplicity · Symbols e Co tion Market risk Perc Action and · Safety · Sustainability o Credit risk log s reaction by · Speed · Synchronisation y Insurance underwriting risk management Pol Commission & fee income risk Beha ce and staff Ensuring a risk culture with: icie Operational risk rien · modern methods/limits vi o s& nts pe r · proactive risk management Ex u Cli e reg Know ledge · constructive control attitude Reputation/brand risk ulat · continuous training ion · discipline as to corrective actions s Markets & economy 31
  • 5. CREDIT SUISSE GROUP RISK MANAGEMENT hard to gain, but easy to lose. Knowl- edge, expertise, experience, integrity, intellectual honesty and the daily con- The 12 organisational principles in risk management duct of each employee, are crucial elements that contribute to an institu- • No conflicts of interest: While principles should hold firm tion’s reputation. Thus, management independent reporting as to line over time, the dynamics of financial has to lead by example. versus back office/models/price markets command a continuous ex- amination of the principles based on checking/credit decisions/ Internal Code of Conduct experience, observation and re- limits/etc. One of the strengths of Credit Suisse search. The issue is not the intellec- • Integration of risk, insurance, risk Group is the competence and diverse tual level of the 12 principles but mitigation and financial manage- skills of its staff. Despite global diversi- rather their diligent implementation. ment. ty, our corporate culture has to be The identification, measurement, based on common denominators and management and control of risks is shared values. This has led to the 4. Rigorous disciplinary measures in not a programme but a continuous introduction of our internal group-wide case of non-compliance/ process. Code of Conduct, approved by both breaches. the Board of Directors and the Group • Know and play by the rules: A. Executing the fundamentals Executive Board at the beginning of everybody is aware of the conse- 2000. Especially in fast-changing 1. Risk is uncertainty about future results. quences. times, common values help to give the • Risks must be respected, not • Responsibility for adequate individual a sense of focus; they create feared: symmetry between as- control environment not only with identity and a sense of belonging. pired gains and potential losses. immediate heads: Spelling out our six ethical and six it is a management issue at large. performance core values and guiding • Risk=Opportunity: principles on page 34, the Code of intelligent, informed risk taking Conduct extends and supplements with corresponding risk/return. 5. Completeness, integrity and existing compliance manuals, • Convergence of market directions relevance of data/information/ directives, guidelines and policies. much higher in turbulent times: systems as a base. The complete Code of Conduct watch liquidity/flexibility aspects. • Management of risks is impossi- applies to over 80,000 employees, ble without information about and is available in 19 different them: also know what you do not languages. 2. The guiding 6 S’s for the know. systematic mental discipline of an organisation. • What is measured, observed and rewarded gets attention. • Strategy →structure→system(s), simplicity→safety→speed. • Serious data show the following characteristics: complete, objective, consistent, 3. Discipline, clear structure, transparent, comparable across allocation of responsibility the institution, interpretable, and accountability are basic auditable, replicable, teachable preconditions. and, above all, relevant and credi- • Transparency as to policies, ble as to facts and perceptions. procedures and manuals. • The data collection must be in a • Discipline regarding strategy, reasonable cost/benefit or tactics, control and compliance: cost/risk mitigation relationship. “ownership” of issues and risks. • Credibly quantified and relevant • Clear and communicated respon- risks represent an opportunity in sibility and accountability for legal, an overall context: incentive and implicit contracts. without credibility and relevance of data/quantification, scepticism and cynicism abound. 32
  • 6. • Sourcing, sharing and storing of • “Reductio ad absurdum” may lead 11. Responsible control/risk culture vertical and horizontal information to a “model figure” but most are as important as the most is especially important in times of probably produces the wrong sophisticated risk management staff turnover, restructurings and conclusions for the really relevant tools. mergers. issue. • Only the mastering of all major • Comparison of absolute model risk types contributes to a B. Retaining perspective figures with those of third parties sustained excellent reputation. is questionable; prime value • Mistakes or misjudgements are 6. Newness and/or complexity added of a good model is the in- unavoidable: of a project – combined with ternal trend over time, assuming the ways of correcting them are uncertainty – can add risks. model consistency. part of culture. • Simplicity for average human beings. Complex structures, com- • Risk-return culture for everybody. plex restructurings and systems 9. Risk management is a continuous • Ongoing motivation of staff and require: process, not a programme. communication with all major – break-up of problems; • Best practice and integrated ap- stakeholders. – additional, continuous proach as targets. • Risk culture at large is the final assessment; • Proper risk awareness for every- responsibility of top management – anticipation and ability to one within holistic framework. and board of directors. react. • Regular checks on strategy, structure, system(s), simplicity, 12. Human element is THE critical 7. Risk management is part art, part safety, speed. Continuous factor for success. science. adjustments to new paradigms: • Good mix of professional, open- • Facts, perceptions, expectations updated, major risks inventory. minded and honest people with are all important; quantitative and • Focus on long-term initiatives ver- educational, professional and life qualitative judgements are crucial. sus short-term ones: experience and integrity. • Common sense: not minutiae, focus on integrated approach with • Professionalism includes “feel, but relevance and credibility are emphasis on promotion rather intuition and inspiration for risk the key. than on monitoring. and market direction”. 8. Limitation of models. C. Emphasising the human aspect • Not all risks are relevant and/or 10. A financial institution is a quantifiable, but risks which can- knowledge company. not be measured directly often • Source, share, synthesise and have indirect consequences for save knowledge: avoid brain share price, growth, clients etc. drain. • Models are always only part of an • Knowledge alone is not enough: overall risk management the added value is generated by approach. its implementation. • Models are as good as underlying • Learn from mistakes, both assumptions and information personally and institutionally. input: • Culture of open communication “garbage in – garbage out effect”. on “experience” and know-how, • Be able to “read” the model: both horizontally and vertically. never forget common sense. • Continuous learning as part of evaluation/incentive process. 33
  • 7. CREDIT SUISSE GROUP RISK MANAGEMENT 12 core values for employees of Credit Suisse Group Core ethical values Core performance values Integrity Service We realise that our global franchise is based on our core We are committed to providing superior service to our ethical values and our long standing reputation for in- clients. We believe that knowing our clients and offering tegrity, trust, confidentiality, fairness and professional- them value by combining good judgment, in-depth ism. We respect the interests of our stakeholders knowledge and prompt and courteous service leads to (clients, employees, shareholders, service providers, success. government authorities, financial regulators, competi- tors, media) and of society as a whole. Excellence We are committed to excellence through continuous Responsibility improvement of our management practices and know- We honour our commitments and take personal respon- how. Problems or mistakes are viewed as a chance to sibility for our actions. We promise only what we can improve. deliver. We do not mislead our stakeholders. Teamwork Fairness We believe in achieving more for our stakeholders by We believe in courteous and respectful treatment of our working together to draw upon our individual and collec- stakeholders. We support equal opportunities and a tive strengths and abilities worldwide and across busi- work environment free of discrimination and harassment ness lines. of any sort. Commitment Compliance We recognise individual contribution to the current and We acknowledge the importance of all relevant laws, future success of our firm and reward it objectively, tak- regulations, policies and standards, both internal and ing into account the personal contribution to targets, external, and comply with them. We are committed to governance and teamwork. Every employee contributes exemplary management discipline and a first class her/his best to reach our common goals, by maintaining control and compliance environment. focus and intensity of effort. Transparency Risk culture We seek constructive, transparent and open dialogue We base our business operations on conscious, disci- with our stakeholders based on fairness, mutual respect plined and intelligent risk taking. We believe in inde- and professionalism. pendent risk management, compliance and audit processes with proper management accountability for Confidentiality the interests and concerns of our stakeholders. We treat confidential as such and do not disclose non- public information concerning the Credit Suisse Group Profitability companies, their clients and employees, unless required We are committed to sustained profitability which by law. enables us to carry out our strategies, make long-term investments, fairly compensate our staff and achieve an attractive return for our shareholders. Legality, compli- ance and our core ethical values, however, come before profit. 34
  • 8. Risk management governance and specialise on specific risks with legal entity Credit Suisse First Boston The structuring of Credit Suisse Group the help of tailor-made management including investment banking and insti- as a series of distinct business units – tools where appropriate and relevant. tutional asset management, and legal introduced in 1996/97 – is designed Group-wide risk management ap- entity Credit Suisse Group as the hold- to increase transparency, disci
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