Right after Bank of China (BOC) announced the resignation of its chief risk officer, the country's aother big lender, China Construction Bank (CCB), made an appointment of its own.

 

On June 14, Zhu Xiaohuang was named chief risk officer of CCB after working with the Hong Kong-listed bank for 25 years.

 

Zhu's role, like any bank's chief risk officer, is to develop and implement an enterprise-wide risk management and internal control strategy that includes all aspects of risk such as credit risk, market risk and operational risk.

 

The only difference is that this time CCB chose to hire a Chinese executive instead of someone from overseas after a global recruitment process lasting nearly a year.

 

"It is hard to look for such a talent that has abundant international risk management experience on one hand, and knows well the Chinese practices and language on the other hand," CCB said in a statement.

 

CCB believes Zhu is qualified in these areas as he has had years of experience from front office to back office operations; and in particular he is a veteran in credit management, regulation compliance and risk management.

 

Zhu is also the first person in the country to edit a monograph on risk management in commercial banks in 1995. The book was highly appraised at home and abroad, according to the CCB statement.

 

CCB's choice of Zhu seems even more sensible after Lonnie Dounn, the American chief risk officer of BOC, submitted his resignation in April as a result of being unaccustomed to the country's situation and because of ineffective communication.

 

Zhu answers confidently when questioned about how long he will serve as the chief risk officer.

 

"My advantage is that I have worked with CCB for many years, and I know well how the bank operates. Besides, it is very important for a risk officer to have working experience in marketing and know the local situation," he said.

 

At the top of Zhu's agenda as CCB's new chief risk officer is to set up a risk team right away throughout the bank.

 

"My team will include chief risk officers at the tier-1 branch level, risk directors at the tier-2 branch level, and risk managers at the operating office level," Zhu told China Daily.

 

CCB will adopt vertical management within Zhu's risk management team, which means that risk officers at the bank's local branches will report directly to the headquarters and to the head of the local branches rather than reporting only to the presidents of local branches.

 

As part of CCB's efforts to strengthen its risk management, the bank last year set up a vertically managed internal auditing team.

 

"We want to finally adopt a managing matrix crossed with vertical as well as horizontal organizations that are in line with international best practice," Zhu said.

 

Tier-1 branch chief risk officers have already been elected from local branches to take part in a training program, and the risk directors at the tier-2 branch level will be named in July, according to Zhu.

 

As well as setting up his working team, Zhu has also begun constructing an integrated risk management framework that covers all aspects of risk across the organization including credit risk, market risk and operational risk.

 

CCB's risk management framework will use the Basel II Accord as its guide. Advanced financial tools such as "economic capital" in the Basel Accord have been adopted in terms of covering losses caused by unexpected risk.

 

As for operational risk, Zhu believes that since banks are running risk businesses it is not realistic for them to completely avoid scandals considering a very high cost would be involved otherwise.

 

"A good bank is the one that knows how to control scandal under small probability," Zhu said.

 

The new chief risk officer said he would not take a corruption scandal as entirely bad news. "The scandal should be spread a thousand li (500 kilometres) away to warn people of potential risks," Zhu said. "And to cover it up would only lead to larger scandals."

 

"The key to a banking business is to make profit while covering various risks at a reasonable cost," Zhu said.

 

In terms of credit risk, CCB plans to strengthen its credit granting system. Tighter controls on credit are expected over the next few months in the real estate and derivatives sectors.

 

Considering the market risk, and as most commercial banks are facing the pressure of excessive money supply, CCB intends to rearrange its investment portfolio to expand from traditional investments such as bonds and commercial bills to higher returns with higher risk investment products.

 

CCB's new chief risk officer also believes that a risk-oriented culture is very important to the internationalized bank.

 

(China Daily July 4, 2006)