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Rizwan Chughtai
Risk exposure arising from business activities
Need to effectively manage because of Potential business losses Ensure business continuity
Wider and/or complex risk requires more prudent management
Risk appetite determines risk exposure
Optimize risk-reward trade-off rather than minimize/eliminate risk.
Risk taking is inherent activity but neither engage in business with unnecessary
risk nor absorb risk that can be transferred Regulatory Case vs Business Case
Strategic Level Encompasses senior management and BOD
Macro Level Within a business area or across business
lines Micro Level
‘On-the-line’ risk management
Need to have properly structured RM
Introduced in 2003 (BSD Circular 7 of 2003)
Issued to enable financial institutions to establish their own RM procedures
Provide an overview of actions and not intended to detail every control procedure
Flexible and adaptable with the size and complexity of business
Areas covered Credit Risk Market Risk Liquidity Risk Operational Risk
Certain basic principles for risk management applicable to all institutions irrespective of size and complexity
Board and senior Management oversight“The overall responsibility of risk management
vests in the Board of Directors, which shall formulate policies in various areas of operations of the bank. The senior management is, interalia, responsible for devising risk management strategy and well-defined policies and procedures for mitigating/controlling risks, which should be duly approved by the Board. The senior management is also responsible for the dissemination, implementation, and compliance of approved policies and procedures.”
Integration of Risk Management“At operational level, risk assessment may be made
on portfolio or business line basis, however, at the top level the management need to adopt a holistic approach in assessing and managing risk profile of the bank.”
Business Line Accountability“Irrespective of a separate risk review or
management function individuals heading various business lines or units are also accountable for the risk they are taking.”
Risk Evaluation/Measurement“Wherever possible risks should be
quantitatively measured, reported, and mitigated.”
Independent review“The risk review function should be independent
of those who approve and take risk. The review should include, interalia, stress tests exposing the portfolio to unanticipated movements in key variables or major systemic shocks.”
Contingency planning“Banks should have contingency plans for any
unexpected or worst case scenarios.”
• The individuals who take or manage risks clearly understand it.
• The organization’s Risk exposure is within the limits established by Board of Directors.
• Risk taking Decisions are in line with the business strategy and objectives set by BOD.
• The expected payoffs compensate for the risks taken
• Risk taking decisions are explicit and clear.• Sufficient capital as a buffer is available to
take risk.
Board and Senior Management Oversight BoD to approve credit risk strategy and other
significant policies SM to develop and establish credit risk policies
& credit administration procedures and guide staff
Setting up appropriate organization structure and specify duties/responsibilities
Credit management discipline
Credit Origination Assess risk profile before extending credit Cash flows and repayment capacity Appropriate utilization of credit
Limit Setting Credit Administration
Documentation, Disbursement, Monitoring, Repayment, Credit Files, Collateral Documents
Measuring Credit Risk Internal Risk Rating Rating Review Credit Risk monitoring & Control Risk Review Delegation of Authority Managing Problem Credits
Board and Senior Management Oversight Organizational Structure Risk Management Committee Asset-Liability Committee Middle Office Risk Measurement
Interest Rate, Foreign Exchange, Equity
Risk Measurement Repricing Gap Models Measuring Risk to Economic Value Value at Risk
Risk Limits Gap Limits Factor Sensitivity Limits
Board and Senior Management Oversight Early warning indicators of liquidity risk Liquidity Risk Strategy
Composition of Assets & Liabilities Diversification and Stability of Liabilities
ALCO/Investment Committee Liquidity Risk Management Process
Liquidity Risk Measurement & Monitoring Contingency Funding Plans (CPF) Use of CPF for Routine Liquidity Management Use of CPF for Emergency & Distress
Environment Cash Flow Projections Liquidity Ratios and Limits
Operational Risk Management Principles Ultimate accountability with BoD BoD to ensure effective & integrated OpRisk
Management Framework BoD and SM to identify and define all
categories of Operational Risk Document and communicate OpRisk policies
and procedures Integrated business and support functions Diligence of business line
Risk Assessment and Quantification Risk Management and Mitigation Risk Monitoring
Key Risk Indicators (KRIs) Risk Reporting Establish Control Mechanism Contingency Planning
Guidelines in 2004 (BSD Circular 7 of 2004) Properly designed and strictly enforced
system of internal controls helps: protect the organization’s assets and
profitability from operational losses and frauds and forgeries
produces reliable financial and management reports
helps compliance with laws and regulations creates value for the stakeholders
• BSD Circular 13 of 2004• Need for comprehensive BCP arrangements• Key considerations
– Responsibility– Components of BCP– Critical Business Line– Geographic Concentration– Centralization of Operations– Recovery Time Targets– Testing– Updation and Validation– Compliance
• Need to have synchronized and adhesive policies covering different areas
• Consolidated instructions on policy framework (BSD Circular 3 of 2007)– Minimum Areas• Risk Management Policy • Credit Policy• Treasury & Investment Policy• Internal Control System and Audit Policy• I.T. Security Policy • Human Resource Policy• Expenditure Policy• Accounting & Disclosure Policy
• BSD Circular 17 of 2008• ICAAP supplements quantitative risk
assessment in Pillar-1 of Basel II• ICAAP is set of policies, methodologies,
techniques, and procedures to assess the capital adequacy requirements in relation to the bank’s risk profile and effectiveness of its risk management, control environment and strategic planning
Elements of ICAAP Board and senior management oversight Sound capital assessment Comprehensive assessment of risks Monitoring and reporting Internal control review
Core for every angle of Risk Management
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