In these months of crisis, concerns about the stability of the financial system are growing. Markus Voegelin, head of risk at Raiffeisen Switzerland, told finews.com which safety nets Raiffeisen has in place.
Mr. Voegelin, how badly is Raiffeisen Group affected by the current market turmoil?
Like all banks, we are monitoring the situation very closely. This is part of our forward-looking risk policy and risk management as a systemically relevant domestic-oriented retail bank. We are therefore not heavily exposed because of our low-risk loan book. The decisive factor is how the economy develops further, which in turn is influenced by the geopolitical situation. In addition to the Ukraine war, there is also a risk of disrupted supply chains, skyrocketing commodity prices, and further interest rate tightening.
To what extent can banks breathe a sigh of relief after the end of the era with negative interest rates?
The positive key interest rate is a step toward normalization. It creates the right incentives for savers again because market conditions will create better interest rate conditions for customers on personal, savings and retirement accounts.
«The steeper the yield curve, the more attractive the margin in the interest differential business»
Even though the yield curve has flattened, it is still advantageous for banks at the moment. They can lend out their deposits in such a way that, with the classic maturity transformation, the interest rate spread business becomes more profitable again. At the same time, refinancing is becoming more expensive for us.
Why?
If we as a bank want to borrow money on the market, we already have to pay much higher interest rates depending on the maturity. In the medium term, the interest rate situation may develop to the disadvantage of the banks. The situation would become more difficult with a flat or even inverse yield curve, or if the yield curve were to shift upwards in parallel because of a shock.
What is your main scenario in terms of interest rate development?
We permanently simulate different scenarios in line with regulatory requirements. In this way, we are prepared for various developments. However, we do not apply any actual main scenario.
How are interest rate risks managed within the bank?
For a traditional retail bank with a focus on lending and deposit business, managing interest rate risk is of central importance. That's why we use a system that on the one hand defines the risk framework and on the other limits the interest rate risks.
Do banks always profit in phases of interest rate increases?
There is no general answer to this question. The decisive factor is the slope of the yield curve over the maturities. The steeper the yield curve, the more attractive the margin in the interest rate differential business.
How does risk management work with sustainable investments?
On the client side, ESG factors play into all risk categories. Conversely, the opportunities in sustainable investing are to make the portfolio more robust and reduce investment risk by investing in companies that operate sustainably.
«For risk management, it is important to have a comprehensive framework that applies to the entire group»
Or, for example, environmental considerations flow into client advice. This includes, for example, our advice on planning the use and renewal of a property.
There are already initial disclosure requirements for ESG investments. Will regulation increase even further?
These decisions have to be made by the financial market supervisory authorities. But one thing is clear: the financial sector can and must make its contribution to sustainable, climate-friendly development. We want to play an active role in preparing this path.
What are the most essential elements for keeping risks fully under control at Raiffeisen?
It is important to have a comprehensive framework that applies to the entire group. The technical infrastructure is an important part of this, but not the only one. Also part of it is a risk strategy that is translated into a risk policy, which also defines the risk appetite. If everything works together properly and the system remains stable over time, the group is well positioned.
What does that mean in concrete terms?
In our bank, a forward-looking attitude and prudent risk-bearing capacity principles are central. This, combined with a qualitative growth strategy, has paid off at Raiffeisen in recent years.
Who ultimately decides when risks are still sustainable?
Like many other banks, we follow the «Three Lines of Defense» in risk management. Different units in the value chain have to take care of risk management.
How does this interaction work?
The first line of defense is on the customer front; at Raiffeisen, these are the organizational units in the customer business. The second line ensures that the customer front behaves along the defined lines and that no red lines are crossed. To strengthen the Swiss financial center, it was necessary to expand compliance in recent years. The third line of defense is internal audit, which monitors the other two lines in terms of regulatory compliance.
How difficult is risk management in a very decentralized group like the Raiffeisen Group?
Risk management is not more difficult, but a question of organization. The exchange between the individual Raiffeisen banks and Raiffeisen Switzerland is crucial.
Where has the need for compliance been greatest in recent years?
In order to strengthen the Swiss financial center, it was necessary to expand compliance in recent years. Among other things, this has been reflected in the fight against money laundering as a central element of compliance. This remains a core task, which is why all banks are constantly working to improve their defense mechanisms.
New capital adequacy regulations are to come into force in Switzerland at the beginning of 2024. What is your assessment of the bill, which is currently still being debated in parliament?
In the implementation of the last stage of the new international regulatory framework, i.e. Basel III Final, the Raiffeisen Group is committed to ensuring a level playing field, especially for domestic banks. In addition, the systemic stability of the financial center should not suffer as a result of the new regulations.
«Raiffeisen Switzerland has been made aware of how important reputation is»
At Raiffeisen, we have modeled the effects. We have come to the conclusion that the new capital adequacy rules will not have a strong impact on the capital side of the group.
And what are the effects on the product side? The Association of Cantonal Banks assumes that mortgages will become more expensive because of the new capital adequacy rules.
It is not possible to make a blanket statement on this. On the one hand, the nature of the various credit products must be taken into account. On the other hand, the decisive factor is whether and to what extent purchased products or the bank's own products are sold, which have to be listed in the balance sheet.
The reputation of Raiffeisen has suffered in recent years because of the behavior at the top of the bank. How have you dealt with these reputational risks?
Raiffeisen Switzerland has been made aware of how important reputation is. We have therefore made great efforts in recent years to improve corporate governance. In addition, employees are sensitized to risk issues in further training courses.
What role does risk awareness play in this?
Risk awareness is an important element of holistic risk management. For example, information security can only exist if cyber risks are known. Here, people are the weakest link in the defense mechanism.
«Risks can only be taken if they are understood and controlled»
Employees must therefore be aware of the risks they are exposed to and the risks they take. But where there are risks, there are always opportunities.
What do you mean exactly?
A bank cannot generate income without risks. But it is very important to only take risks that are understood and controlled?
Do these controllable risks differ depending on the nature of the business?
Yes. In the lending business, for example, it's about lending money to a person or an institution. This requires them to assess the potential borrowers. So there needs to be an assessment of creditworthiness and borrowing capacity.
What is the situation in asset management?
In the investment business, it must be possible to fully document the origin of assets. At the same time, customer advice must be provided in line with the customer's risk profile.
«With the human factor, there is always a residual risk»
This requires advisory staff to have the right professional qualifications and a keen awareness of customer needs.
What needs to be considered in terms of operational risks?
At our bank, the main focus is currently on cyber risks. In addition, we are constantly increasing precautions against fraud or weighing up risks in the areas of law and compliance.
To what extent does digitization help to contain the various risks?
The new technical possibilities help make unauthorized access to the cash register more difficult. But one residual risk always remains: the human factor.
Markus Voegelin has been chief risk officer since fall 2019 and is a member of Raiffeisen Switzerland’s executive board. Previously, he was chief risk officer of Vontobel Group and held various executive positions at several internationally active banks. He studied economics at the University of Basel and holds a PhD from the University of Zurich.
