Woori Bank Reduces Operational Risk With SAS®

Operational risk is an ever-present challenge of the banking industry, inhibiting performance and reducing profits as banks need to keep adequate reserves of capital to cover potential losses. But in recent years, corporate wrongdoing, high-profile fraud and major process failures have put the dangers of operational risk – and the consequences of poorly managing it – in the spotlight.

Against this background, Woori Bank has become a benchmark success story in operational risk management and a reference for Korea's Financial Supervisory Service, setting the standard for other Korean banks to follow.

Woori is "the reigning bank" in Korea with a history and tradition spanning over 100 years to 1899, with the foundation of the Commercial Bank of Korea. Following a series of mergers and acquisitions, in 2002 the corporate name was changed to Woori, the Korean word for "we." In 2004 Woori Bank posted profits of KRW 2 trillion (just over US$2 billion) on total assets of KRW 135 trillion (US$137 billion).

The bank currently has more than 14 million customers and 10,000 employees, and an extensive domestic sales network as well as an overseas presence in selected regions of the world. With globalization, Woori needed to align to the international standards of the G10 group represented on the Basel Committee.

Operational risk management – a business opportunity
Tae-Woong Chung, Woori's Chief Risk Officer and Senior Vice President, explains the philosophy that underlies Woori's operational risk strategy: "Risk management does involve following international regulatory trends such as Basel II, but it is also about making more profit. The goal of risk management is healthy assets and healthy customers. Woori has an aggressive sales strategy so we wanted to balance this with the best possible risk management strategy."

One of the challenges that Woori faced was the lack of personnel with risk expertise in Korea – people who understand the Basel II culture. "I guess it is always a challenge for a pioneer. But we were fortunate in that we had high-level commitment internally and we enjoyed a good relationship with SAS Korea, who provided great support," says project leader Mi-Kyung Yoo.

In 2003 Woori started developing its strategy to define a risk management framework and directions, and from May to October 2004 it implemented a simple test system to prepare the data for operational risk management. In December 2004 the project was accelerated by the need to meet the FSS's Basel II requirements for operational risk by 2007. The bank worked with its global consultant PwC and SAS Korea to construct a system that went live on schedule in December 2005. The project scope extends across two regions (Asia Pacific and Europe, Middle East and Africa).

Analytical capability
Woori chose SAS OpRisk Management for the implementation, largely on the basis of SAS software's system performance, open architecture and extensibility. (Woori aims to extend the solution to affiliate branches and to broaden the scope of the project beyond operational risk to embrace credit risk and market risk.) In addition, Woori was well aware of SAS' strengths on major collaborative projects, based on a long business partnership. "The main criteria for software vendors was measurement capabilities, and SAS offered most value in this area: quality software, methods and expertise. SAS offers greater accuracy and consistency than other vendors and far greater analytical capability," says Mi-Kyung Yoo.

Initial return on investment figures will be quantified in 2006, but the business benefits of the implementation are already clear.

Woori Bank has a large branch network (719 domestic and 17 international) and the operational risk solution gives it more integrated process management across the entire network. There will be at least three users of the operational risk system in each branch, and Woori has put a lot of emphasis on the transparency of its risk management approach, for example by publicizing its policy, publishing manuals and training staff. "The project is about technology but it is also about creating a risk-aware culture," says Mi-Kyung Yoo. "The two go hand-in-hand." Woori Bank has rolled out a standard approach to risk management that allows it to assess the risk position of each branch on a regular basis. "We have created a framework in which the branch managers have much greater autonomy in pursuing sales," adds Mi-Kyung Yoo.

Beating fraud
The most obvious benefit of operational risk management is incident prevention through risk self assessment (RSA) and decision-making support, including an early warning system. "Continuous risk monitoring provides timely information to the board of management and department heads. By supporting our decisions with reliable information, we can intervene to prevent operational risk, particularly the risk posed by fraud," says Mi-Kyung Yoo. "Based on our positive experiences in operational risk, we are now keen to extend our use of SAS to credit risk and business intelligence," he adds.

Boosting profits
The second benefit of operational risk management is of course the reduction of regulatory capital. Organizations that advance from the standard approach to the foundation internal ratings based (IRB) approach can reduce their regulatory capital requirement by 10 percent. Those that move to the advanced IRB approach can reduce their regulatory capital requirement by 30 percent. At the time of writing, Woori Bank anticipates an overall saving on regulatory capital of 23 percent. When you consider that under the standardized approach, Woori Bank has to set aside 5 percent of its capital to cover risk, this will release a huge amount of assets to earn interest and generate profits.

"We are confident that the progress we are making is in accord with the demands of the Basel Committee and the FSS," says Tae-Woong Chung. Woori Bank is now seen as the pace-setter for operational risk management in Korea – others are designing roadmaps to catch up in meeting the FSS timetable. As a result, Woori has seen a steady improvement in its international market ratings with agencies such as Moody's, S&P and Fitch, and has raised its international profile, which helps to attract high-quality customers from overseas. "There is no doubt that a successful risk management strategy improves market position, brand image, customer trust and stakeholder confidence," concludes Tae-Woong Chung.

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