The implementation and oversight of a new regional and local-level risk governance framework within a major Asian bank is no easy task. At Bank of Tokyo-Mitsubishi UFJ (BTMU) the individual charged with this responsibility is Hiroaki Demizu, following his appointment as chief risk officer for Asia in August 2015. BTMU is Japan's largest bank, established in January 2006 following the merger of the Bank of Tokyo-Mitsubishi and UFJ Bank.
In his role as regional CRO, Demizu is based in Singapore and oversees various risk functions including credit risk, market risk, liquidity risk and operational risk across BTMU's Asian branches. Prior to his appointment and the establishment of a regional risk function, risk departments in each country reported to their local country general manager rather than a regional CRO.
"The creation of a regional and country-level CRO offers a holistic view of risk management locally and quickens the pace of risk and incidence reporting to the regional CRO and senior management in Tokyo," says Demizu.
Demizu's 25 years of experience in risk management at Mitsubishi UFJ Financial Group (MUFG) and its subsidiary BTMU both in Japan and the US means he is well equipped to handle this task. Prior to his appointment as regional CRO, he was the general manager of the global markets planning division at BTMU and was also global head of regulatory affairs for MUFG.
After taking over the leadership of the risk management group in Singapore, Demizu implemented a number of initiatives, including a harmonised risk governance structure across all branches and countries, ensuring timely risk escalation and reporting to senior management and the development of an integrated stress-testing framework.
To ensure a smooth transfer of information between the regional office and local country branches, Demizu implemented a dual reporting line where local country CROs would report into the local country general manager and to the regional CRO. The whole framework is supported by a regional risk committee and regional risk subject matter experts.
However, the difficulty in implementing a regional/country CRO reporting matrix was that historically, risk departments only reported to the country general manager and there was no local CRO in place.
"The purpose of this scheme is to ensure a reciprocal flow of information between branches and regional headquarters and to help our branches truly realise the added value of a regional risk centre of expertise while allowing our regional office to receive the necessary data to perform proper benchmarking analysis. The challenge was getting each country general manager to realise the importance of creating a local CRO function," says Demizu.
With the group having largely implemented Basel III's liquidity coverage ratio requirements across its branches and with a regional/country CRO network in place, Demizu says he is now focused on the Basel Committee's Fundamental review of the trading book (FRTB) and its implications for the bank regionally.
"For us it is about having a two-way approach. Firstly, a top-down approach from Tokyo where head office is building an in-house platform that will be able to handle both the standard approach and internal model approach for all branches. Secondly, we will take a bottom-up approach and look at each regulator's interpretation of FRTB and then decide which approach is most relevant and cost effective for each country. That is our biggest challenge at the moment from a regulatory perspective," he says.
Demizu is also keen to point out that global regulations or rules such as leverage ratio, capital adequacy ratio or total loss-absorbing capacity (TLAC) reforms may not necessarily be in the best interests of local regulators and may also pose a threat to sustainable growth in Asia.
"In some cases, just following the global rules may not always be what is best for an individual country. We have to work closely with local regulators to assess their full impact," he says.
And while developments relating to OTC derivatives regulations and collateral management are currently managed out of the Tokyo head office, Demizu says the strength of the new CRO framework is that each local CRO is in regular contact with local regulators to understand any local nuances.
"Regulators can have very different approaches and that is why it is vital to have a local team and local knowledge on the risk side. For example, a number of countries in the region have not drawn up their rules relating to margin requirements for non-centrally cleared derivatives but once we start seeing local regulations we will deal with them," he says.