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Rizwan Chughtai
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Risk exposure arising from business activities
Need to effectively manage because of
Potential business losses
Ensure business continuity
Wider and/or complex risk requires moreprudent management
Risk appetite determines risk exposure
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Optimize risk-reward trade-off rather thanminimize/eliminate risk.
Risk taking is inherent activity but
neither engage in business with unnecessary risk norabsorb risk that can be transferred
Regulatory Case vs Business Case
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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
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Introduced in 2003 (BSD Circular 7 of 2003)
Issued to enable financial institutions toestablish their own RM procedures
Provide an overview of actions and notintended to detail every control procedure
Flexible and adaptable with the size and
complexity of business
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Areas covered
Credit Risk
Market Risk
Liquidity Risk Operational Risk
Certain basic principles for risk managementapplicable to all institutions irrespective of sizeand complexity
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Board and senior Management oversightTheoverall responsibility of risk management vests in the
Board of Directors, which shall formulate policies invarious areas of operations of the bank. The senior
management is, interalia, responsible for devising riskmanagement strategy and well-defined policies andprocedures for mitigating/controlling risks, which shouldbe duly approved by the Board. The senior managementis also responsible for the dissemination, implementation,and compliance of approved policies and procedures.
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Integration of Risk ManagementAt operational level, risk assessment may be made on
portfolio or business line basis, however, at the top levelthe management need to adopt a holistic approach in
assessing and managing risk profile of the bank.
Business Line AccountabilityIrrespective of a separate risk review or management
function individuals heading various business lines orunits are also accountable for the risk they are taking.
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Risk Evaluation/MeasurementWherever possible risks should be quantitatively
measured, reported, and mitigated.
Independent reviewThe risk review function should be independent of thosewho approve and take risk. The review should include,interalia, stress tests exposing the portfolio tounanticipated movements in key variables or major
systemic shocks. Contingency planning
Banks should have contingency plans for any unexpectedor worst case scenarios.
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The individuals who take or manage risks clearlyunderstand it.
The organizations Risk exposure is within thelimits established by Board of Directors.
Risk taking Decisions are in line with the businessstrategy and objectives set by BOD.
The expected payoffs compensate for the riskstaken
Risk taking decisions are explicit and clear.
Sufficient capital as a buffer is available to takerisk.
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Board and Senior Management Oversight
BoD to approve credit risk strategy and othersignificant policies
SM to develop and establish credit risk policies &credit administration procedures and guide staff
Setting up appropriate organization structureand specify duties/responsibilities
Credit management discipline
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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
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Measuring Credit Risk
Internal Risk Rating
Rating Review
Credit Risk monitoring & Control
Risk Review
Delegation of Authority
Managing Problem Credits
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Board and Senior Management Oversight
Organizational Structure
Risk Management Committee
Asset-Liability Committee
Middle Office
Risk Measurement
Interest Rate, Foreign Exchange, Equity
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Risk Measurement
Repricing Gap Models
Measuring Risk to Economic Value
Value at Risk Risk Limits
Gap Limits
Factor Sensitivity Limits
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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
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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
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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
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Risk Assessment and Quantification
Risk Management and Mitigation
Risk Monitoring
Key Risk Indicators (KRIs)
Risk Reporting
Establish Control Mechanism
Contingency Planning
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Guidelines in 2004 (BSD Circular 7 of 2004)
Properly designed and strictly enforcedsystem of internal controls helps:
protect the organizations assets and profitabilityfrom operational losses and frauds and forgeries
produces reliable financial and managementreports
helps compliance with laws and regulations
creates value for the stakeholders
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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
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Need to have synchronized and adhesive policiescovering 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
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BSD Circular 17 of 2008
ICAAP supplements quantitative riskassessment in Pillar-1 of Basel II
ICAAP is set of policies, methodologies,techniques, and procedures to assess the capitaladequacy requirements in relation to the banksrisk profile and effectiveness of its riskmanagement, control environment andstrategic planning
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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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