Pengurusan Risiko - Bank Pembangunan Malaysia Berhad

Pengurusan Risiko
Risk Management
OVERVIEW
Bank Pembangunan Malaysia Berhad (the Bank) being a development financial institution, is entrusted with a
developmental role of providing medium to long term financing to projects in infrastructure, maritime and high
technology sectors.
Laporan Tahunan 2007
To enable the Bank to fulfill its financing intermediary role effectively, the Bank has established a comprehensive risk
management system to identify, measure, monitor and control risks that will promote and maintain high asset quality
and minimize reliance on collateral lending in its endeavor to achieve the mandate set by the Government.
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As a banking institution, where lending is the core business, the Bank is faced with credit risk, liquidity risk, operational
risk, market risk, interest rate risk and product risk in carrying out its activities. In managing its business risk effectively
and efficiently, the Bank has been guided by its Risk Management Policy, which outlines a sound basis for integrated
risk management effort and internal control as components of good corporate governance. Specific policies and
procedures have been established for each risk management function within the Group Risk Management as well as
within the operational functions of the Bank. Towards this end, risk management in the Bank shall provide a
framework to identify, objectively assess and actively manage all relevant potential risks and opportunities.
RISK MANAGEMENT INFRASTRUCTURE
The Board of Directors, is ultimately responsible for the management of risk of the Bank. The Board ensures effective
implementation of the risk management policies and determines the risk level, consistent with the risk appetite of the
Bank. Given the size and complexity of its operations, the Board has established dedicated committees to assist in
overseeing and managing total risks and specific risks faced by the Bank. This has provided the necessary infrastructure
for managing risk within the Bank and for implementing various risk management policies and procedures.
The key committees involved in risk management are as follows:
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Risk Management Committee (RMC)
The RMC, a board level committee, is responsible for the overall risk management of the Bank, including credit risk,
operational risk, liquidity risk, and market risk and asset liability management within the Bank.
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Credit Approval Committee of the Board (CACB)
The CACB, also a board level committee, is mainly responsible to assist the Board in managing credit risk
particularly in the area of loan financing sanctioning. The Committee has been vested with authority to approve
loan/financing application of up to RM250 million. CACB would also evaluate, discussed and recommend to the
Board of Directors on loan/financing application exceeding RM250 million.
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Loan & Investment Committee (LICOM)
LICOM is the Management-level committee that decides on loan proposals and investments of up to its approving
limit, i.e. RM40 million. Loans of higher limit will also be evaluated and discussed at this Committee and would
be recommended higher approving authorities.
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Asset Liability Management Committee (ALCO)
ALCO’s primary role is to manage the interest rate risk, forex risk, liquidity risk and capital adequacy of the Bank.
ALCO is mandated to derive with the most appropriate strategy for the Bank in terms of the mix of assets and
liabilities to generate optimum levels of quality earnings and to guard against the potential consequences of
market volatility, interest rate movement, liquidity constraints, foreign exchanges exposure and capital adequacy
requirement in order to enhance or optimize risk-return. At this Committee, all Market Risk Indicator Limits
approved by the Board are being monitored as well as ensuring the implementation of the various strategies
related to the assets and liabilities management.
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Infrastructure Credit Risk Committee (ICRC)
The approving authority decides on financing application for Infrastructure financing after the ICRC reviews it.
As a prudent step, infrastructure loan proposals for the proposed financing will be deliberated first at the ICRC
to identify the risk issues underlying the loan proposals, before being considered by the approving authority. This
Committee reviews the said proposal paper and gives views objectively and independently.
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Financing Supervision Committee (FSC)
The main focus of FSC (formerly known as Loan Supervision Committee) is to discuss and provide solutions to
loan accounts, which had become problematic and fall into the Non-Performing Loan category.
KEY FUNCTIONAL STRUCTURE WITHIN GROUP RISK MANAGEMENT
Credit Risk
The main objective of Credit Risk is to assist the Bank in managing its credit risk. In achieving this key objective,
Credit Risk screens all financing proposals for any lapse in credit risk, identifies risk issues associated with the
financing proposals and rates the underlying client, business or transaction in accordance with the Bank’s credit
risk guidelines and procedures. In addition, Credit Risk is also responsible to analyze the loan portfolio and to
provide advice on the Bank’s risk exposure by industry rating and returns. The Function is also responsible to
monitor the exposure against its established limits and ultimately lead to maintaining quality loan portfolio.
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Operational Risk
The primary role is to assess, identify and manage the operational risk inherent in all material products, activities,
processes and systems. The function is to develop operational risk management strategies, policies and
framework as well as to communicate and report the best practices in order to effectively manage the
operational risks in the Bank. Included in the Operational Risk function is Business Continuity Management
Coordination, whose main objective is to plan, coordinate, develop, implement and maintain the Business
Continuity Plan (BCP) programme for the Bank.
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Market Risk
The main objective of Market Risk is to monitor interest rate, forex risk, liquidity risk and capital adequacy of
the Bank. In addition, the Function also acts as the middle office for monitoring the investment risk such as in
bonds and equities. In line with the industry best practice, the Function is also responsible to assist the Bank in
optimizing the risk reward through managing Assets & Liabilities that will enhance the maintenance of healthy
and stable financial position of the Bank.
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Technical
The main objective of Technical is to assist operational functions in solving technical issues related to the
projects financed by the Bank and to monitor the status of assets financed by the Bank through periodic
inspections. Technical also takes up an active role in protecting the Bank’s interest through the provision of
technical advisory in ensuring technical viability of the projects being financed and the ability to be implemented
and operated as planned, as well as ensure that the projects are financed adequately and the approved loans are
disbursed especially for payment claims that are based on project implementation progress.
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Laporan Tahunan 2007
The main management function primarily involved in the management of risk in the Bank is Group Risk Management,
which provides the main support to the Risk Management Committee and is responsible for the development and
maintenance of sound risk management policies and procedures for the Bank and its main subsidiaries. In order to
maintain its independence, Group Risk Management reports directly to the RMC and is made up of five (5) functions
as follows:
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Compliance
Compliance function, which is now under Group Legal, is responsible to check and vet through all Letters of
Offer and pertinent documents for the disbursement before submitting to the Bank’s Approving Authority for
signing and approval.
Laporan Tahunan 2007
Risk Management
Pengurusan Risiko
The major areas of risks to which the Bank is exposed to can be summarised as follows:
Credit Risk
The potential loss of revenue and principal in the form of specific provision
arising from the failure of a counterparties or the borrowers to honour debts or
settlement through its lending.
Market Risk
Risk of loss due to adverse movement in the mark-to-market value of the
company’s assets and liabilities.
Liquidity Risk
The risk relates to the ability to maintain sufficient liquid assets to meet
financial commitments and obligations at a reasonable cost and time.
Operational Risk
The risk that deficiencies in information system or internal controls will result
in unexpected loss. The risk is associated with human error, system failure and
inadequate controls and procedures.
Interest Rate Risk
Exposure to loss arising from unfavorable movement in interest rate, resulting
in mismatch between income and expenses between interest bearing asset and
liabilities especially involve the gap in long term against short term financing.
Product Risk
Possibility of product incurring financial or opportunity loss attributed to poor
reception by customer, competitiveness of products terms and conditions,
competencies of promoting and/or timing of entrance of the products.
Forex Risk
Probability of loss occurring from an adverse movement in foreign exchange rates.
Strategic Risk
The current and prospective impact on earnings or capital arising from adverse
business decisions, improper implementation of decisions or lack of responsiveness
to industry changes. This risk is a function of the compatibility of an organisation’s
strategic goals, the business strategies developed to achieve those goals, the
resources deployed against these goals, and the quality of implementation.
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RISK MANAGEMENT PROCESS
Lending activities are subject to constant risk. The Bank realizes that the key success lies in how the risk is managed,
by putting in place clear risk management process that describe the steps taken to mitigate risk as it occurs, to meet
the Bank’s objective.
The management of risk at the Bank is undertaken by the respective operational functions within the Bank and
monitored by the Group Risk Management. This risk management process involves four major processes as follows:
Risk Identification
Identify and analyse risks surrounding the activities and understand how to
respond to these risks.
Risk Assessment and Measurement Quantify and assess risk impact.
Risk Control
Putting systems in place and recommend measures to control and mitigate risk.
Risk Monitoring
Monitor the effectiveness of risk management controls, and report on progress
and compliance.
CREDIT RISK MANAGEMENT
As lending is the main activity of the Bank, the main focus of the Bank’s risk management system has been on the
credit risk faced by the Bank in providing loans to its clients. The Bank believes that a sound credit risk management
system, which encompasses a check-and-balance structure, is necessary to minimize poor loan quality due to
imprudent lending, risk concentrations in the loan portfolio and other judgmental errors that could seriously impact
the overall financial soundness of the Bank.
An effective credit risk management system begins with enhancing the origination of quality loan assets and
continues with the preservation of quality loan assets through the establishment of the necessary internal controls
within the credit process. Management of credit risk is not only vital in protecting the Bank’s loan assets but also to
sustain profits by promoting and maintaining loan asset quality within an environment of loan asset growth. The
process of credit risk management would be as follows:
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Risk Identification & Assessment
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Identifying of credit risk issues on loan proposals by Group Risk Management.
(b)
Implementation of credit rating system to assess/measure the quality and level of credit risk of borrowers.
(c)
Identification of non-compliance of the terms of letter of offer/facility agreement and other requirement
prior to loan drawdown.
(d)
Annual loan review and re-rating conducted on all loans to identify credit risk migration of loan portfolio.
(e)
Stress testing on loan portfolio under various scenarios.
(f)
Credit risk assessment on of the Bank’s new financing products.
(g)
Post-mortem review of Non-Performing loans (NPLs) to identify lapses in credit process, system, people as
well as serve as feedback to relevant functions for upgrading credit skills with the objective that past
mistakes will not be repeated.
Risk Control & Monitoring
The following controls and monitoring measures are maintained within the credit process at the Bank for an
effective credit risk management:
(a)
Maintaining qualified credit personnel for credit processing and review.
(b)
Establishment of Credit policies that document credit risk management in credit evaluation process.
(c)
Management of vulnerable credit and tracking of loans in arrears.
(d)
Benchmarking of assets quality against established limits.
(e)
Loan portfolio analysis on quality of loans and exposure as well as risk distribution.
(f)
Internal Audit findings on non-compliance.
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Bank Pembangunan
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Laporan Tahunan 2007
The Bank has instituted the following activities within the credit process that serve to identify and assess credit
risks to enable the Bank to institute the necessary controls for credit risk mitigation:
The activities involved in the identification and assessment of credit risk and the required controls are instituted at
the following credit process. While the operational functions within the credit process at the Bank have clear
accountabilities and responsibilities for undertaking and implementing the mentioned process, Group Risk Management
plays its roles in monitoring such activities for an effective credit risk management:
The loan origination is the first line of defense against poor risk assessment. Credit judgment of the executives
of the Business Development & Advisory (BDA) and the Credit Analysts of Credit who initiate and process the
loan applications respectively are critical to the quality of the loans. The selection and training of the BDA
Executives and the Credit Analysts are the key factors in ensuring the origination of quality loans based on good
lending judgement.
Laporan Tahunan 2007
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Bank Pembangunan
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At Credit Origination
There is clear segregation between loan initiation/loan sourcing and loan processing as loan is originated by
Business Development & Advisory (BDA) and processed by Credit. Both BDA and Credit are accountable for the
prudent credit business. BDA ensures that the loans are of good quality and carries out preliminary assessment of
the loan proposals to determine the viability of the project and to decide whether the project is worth pursuing
for further evaluation.
Risk Management
Pengurusan Risiko
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At Credit Assessment
The Bank maintains an independent credit evaluation function, which is separated from loan originator to
maintain check and balance. Prudent credit assessment is practiced by Credit to mitigate credit risk issues, with
the involvement of Credit Risk function in providing independent credit risk assessment and credit rating. Being
an independent party not involved in sourcing of the clients, Credit Risk function provides an essential
check-and-balance system against imprudent lending decisions.
During credit risk assessment by Credit Risk function, all credit proposals are rated using a rating system known
as Credit Rating System (CRS) and Project Risk Scoring (PRS) System that process the scores for the key risk
factors and generate the final rating that grade the quality of all credit proposals. The internal credit risk rating
system is developed to better measure the credit worthiness of each customer with the primary objectives to
provide a consistent approach in risk grading of the borrowers and to measure the borrowers’ risk of default
objectively. Risk owners will mitigate all credit risk issues before the approving authorities consider the credit
proposals. The Group Risk Management also reviews credit proposals for completeness of information, quality of
analysis as well as compliance with the credit policies.
Credit Risk management is further enforced with the involvement of Infrastructure Credit Risk Committee (ICRC)
that discusses the credit risk issues and provides independent views on financing proposals for infrastructure
projects before being considered by the approving authorities.
The Bank has instituted clear internal controls to govern the lending activities and assessment of credit proposals
for prudent lending activities through the establishment of Credit Lending Policies & Guidelines, operational
manuals and directives issued and updated from time to time, which would enable the Bank to achieve its
corporate objectives within an acceptable risk profile and risk appetite. The Bank Negara Malaysia (BNM)
guidelines as prescribed under the Development Financial Institutions Act 2002 (DFIA) are also being adhered to.
To ensure highest standard of credit assessment, all BDA executives and Credit analysts must undergo relevant
training programmes to ensure understanding of credit evaluation. In the effort to continuously promote
professionalism and expertise in their work, the Bank encourages all executives in credit-related functions to
secure the Certified Credit Professional (CCP).
The Bank acknowledges that training must be continuous to enhance professionalism and competencies of the
staff and the training programmes must be related to the business sectors that the Bank supports.
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At Credit Approval
The loan approval process, which consists of different levels of approving authority according to loan limits,
reflects the management of credit risk and the Bank’s desire for quality loans. The approval hierarchy, which links
the authority limit to the amount of the loan, will ensure that credit sanctioning remain a critical part of the
risk evaluation system.
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At Credit Disbursement
Loan disbursement requisition is independently checked by Compliance, as a “final gatekeeper” to ensure the
adherence to loan disbursement conditions prior to loan disbursement. Credit Compliance also verifies terms and
conditions imposed in the Letter of Offer as approved by the approving authority.
After the loan is disbursed, the Bank employs a system to monitor the quality of the loan throughout the loan
period. Any deterioration in the quality of the loan will be detected, and corrective measures may be undertaken
to protect the interest of the Bank. Supervision function monitors the borrowers’ conduct of the loan and is
responsible for the loan review to assess current credit risk of the borrower as well as to monitor the progress
of the projects being financed. Loan review is conducted at least once a year and more frequent reviews are
performed on high-risk loans under the watch list. Annual loan review will be re-rated by Credit Risk to identify
credit risk migration for effective monitoring.
Overall credit risk profiles of loan portfolio are reviewed and monitored by Credit Risk by performing stress test
on loan portfolio based on selected scenarios, which include possible downgrading of the accounts and thereon
to compute the Economic Capital Allocation required for the lending exposure.
Credit Risk continuously monitors all limits pertaining to financing portfolio and any breaches or critical level
of exposure is reported to the Senior Management and relevant committees.
The Bank diversifies its loan portfolio and avoids any undue concentration of credit risk in its loan portfolio by
setting credit limit to single customer to manage lending to any specific groups of related borrowers. Credit Risk
reports on the exposure of each customer and percentage of large loan on monthly basis to the relevant
committees and functions of the Bank.
To avoid being over-exposed to any particular economic sector, the Bank diversifies its credit risk by spreading
its loan portfolio across different economic activities. The limit by business sector is guided by the Bank’s Budget
and is reviewed where necessary. Credit Risk advises on the risk exposure by providing reports on loan exposure,
loan by function, size, industry and rating on a monthly basis to the relevant committees and functions of the Bank.
In order to preserve the quality of the loan assets, various controls have been instituted including the
establishment of the Financing Supervision Committee that undertakes to monitor, manage and recommend
recovery strategies for all delinquent accounts, with the objective of preventing them from turning
non-performing. The Committee, which meets once a month, also identifies and monitors accounts for early
signs of loan deterioration.
To better understand how problem loans and losses develop and identify weaknesses in credit and monitoring
process and systems, Operational Risk conducted in-depth post mortem reviews on NPLs and potentials.
Observations and findings in relation to NPLs are communicated as feedback to assist in upgrading credit skills
with the objective that past mistakes will not be repeated. Lessons are learned from root-cause analysis and
generate actions to improve credit risk management process.
An independent assessment of “loan compliance” is undertaken by the Group Audit & Examination of the Bank.
The findings on the non-compliance of policies and procedures are incorporated in the audit findings for the
Audit Committee as well as are communicated to the respective functions as feedback and follow-up.
Laporan Tahunan 2007
At Credit Monitoring
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OPERATIONAL RISK MANAGEMENT
Risk Management
To safeguard the Bank’s bottom line arising from the operational risk, the Operational Risk function of the Bank has
put in place various controls to limit the possible losses from operational risk as well as to ensure that operational risk
are adequately considered at all stages in the decision making process, as follows:
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Risk Identification & Assessment
The following key methods and enablers are in place to assist Operational Risk function to identify and assess
weaknesses in internal processes and systems, product and services, and staff inadequacies:
•
(a)
Use of Key Risk Indicator (KRI) to identify pressure points in internal processes.
(b)
Performing Gap Analysis on critical processes to spot potential risk points in the activities.
(c)
Collecting Loss Event Data.
(d)
Implementing Control Risk Self Assessment (CRSA) to acquire information about business process risks,
while empowering the process owners to take responsibility for identifying and mitigating those risks.
Risk Control & Monitoring
The following key methods and activities are maintained at the Bank to serve as internal controls for an effective
operational risk management:
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(a)
Promoting awareness within the Bank on the need to manage operational risk.
Bank Pembangunan
Laporan Tahunan 2007
Pengurusan Risiko
Operational risk occurs through ineffective (those that fail to achieve their objectives) or inefficient process (those that
achieve their objectives but consume excessive costs), system risk (including system availability, data integrity, system
capacity, unauthorized access and use, and business recovery from various contingencies), people risk (that typically
results from staff constraints, incompetence, dishonesty, or a corporate culture that does not cultivate risk awareness).
(b)
Tracking of operational risk data, risk exposure and loss event by business/service line.
(c)
Measuring the severity of the impact of possible loss to the Bank by assessing the frequency of losses and
their sizes in relation to the value at risk.
(d)
Examining the adequacy of the existing/new operating procedures and internal control systems with
regard to operational risk avoidance.
(e)
Establishment of operational risk management and control process documents, which include policies and
procedures and strategies for mitigating operational risk, as well as procedures for regular reporting on
operational risk management with relevant data and results.
Functional Structure
Operational risk covers the following main areas; organizational structure, product and services, process and systems,
regulatory and statutory, information technology, external factors that impact the operational aspects of the Bank
and negligence of staff that results in possible financial loss to the Bank. The Operational Risk function of the Bank
is responsible for assessing and monitoring these operational risk issues, while the business units and the respective
operational functions within the Bank are responsible for operating within the operational risk management framework
in their functional areas.
The Operational Risk function of the Bank has set in place various systems to assist in identifying possible risk issues,
including the use of Key Risk Indicator (KRI) to identify the pressure points of weaknesses. By monitoring these
pressure points, an early warning of a lapse/weakness/lack of control, such as error rates, high staff turnover rate and
penalties/fines, can be received in order that timely action could be taken.
The method of risk assessment that has been applied at the Bank is Gap Analysis that assists in developing solutions
and serves as preventive measures for curbing the risk issues from turning into major problems. Self-assessment by
the respective business units and operational functions of the Bank on risk issues associated with their activities has
also helped in better risk profiling. The Bank has also developed the Loss Event Data Collection for Operational Risk,
which is part of the Operational Risk framework requirements. Any occurrence specified in 7 Loss categories, which
happens either accidentally or by design that resulted in loss and/or potential loss to the Bank, are captured in the
system. From this exercise, the Bank would be able to increase the level of accuracy and sensitivity of expected/unexpected
issues, hence would ensure that the same incident would not be repeated in the future by improving internal controls.
The Bank has also undertaken various activities of sound principles of Operational Risk Management, including to
develop IT Risk Management Framework, in its effort to monitor the risk more prudently and dynamically especially
in the IT process. In addition, the Bank has undertaken to promote and implement the Operational Risk Management
policy by enhancing the level of awareness within the Bank and Group. A number of in-house risk management
seminars have been organized to all levels of staff within the Bank to inculcate risk awareness culture.
As part of the Bank’s strategy to mitigate risks and manage the impact of loss events, the Bank has embarked on the
implementation of the Business Continuity Plan (BCP) programme for the Bank, which is handled by Business Continuity
Management, a designated unit under Operational Risk function of the Bank.
LIQUIDITY RISK MANAGEMENT
Risk Identification & Assessment
The key methods involve in the identification and assessment of liquidity risk is as follows:
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(a)
Use of risk indicators.
(b)
Assessment of current liquidity position based on all cash inflows and outflows projection.
(c)
Liquidity Gap Analysis.
Risk Control and monitoring
The following measures serve to monitor and control liquidity risk:
(a)
Establishment of appropriate limit.
(b)
Regular review of the risk indicator.
(c)
Monitoring of funding requirements based on budget and strategic plans.
Functional Structure
The management of liquidity risk is an important part of the Asset-Liability Management (ALM) process in the Bank
to ensure that the Bank can honour all its financial obligations as they fall due and at the same time is able to fund
its business commitments as well as its future growth. While Market Risk function is responsible for the overall yearly
liquidity management analysis and reporting on a macro-level for the Bank, day-to-day liquidity management will be
the responsibility of Group Treasury, who will monitor and measure liquidity gaps and liquidity requirements for the
Bank and its subsidiaries. The liquidity gap is a profile of the timing of all the cash flows of the Bank to identify the
mismatches in the cash inflow (assets) and cash outflow (liabilities). The cash flows are summed into time buckets and
the difference between the inflow and outflow is the gap for the respective time bucket.
Liquidity Risk is also assessed and managed through the application of risk indicators such as capital adequacy,
liquidity ratios, diversification of funding and counter party limit, which will be reviewed annually or when
necessary. Short-term (up to 3 months) liquidity crunch shall be met by money market borrowings and disposals of
marketable securities.
To effectively manage liquidity, various factors are analysed such as anticipated funding requirement, sources of funds,
Bank’s fund-raising capacity, present and anticipated asset quality, present and future earnings capacity and present
and planned capital position. ALCO shall be advised on the structuring and modification of the operating unit loans
in terms of sources of funding, pricing, tenor and repayment structure, which would have significant impact on the
Bank’s liquidity.
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Bank Pembangunan
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Laporan Tahunan 2007
Liquidity risk relates to the Bank’s ability to maintain sufficient liquid assets at a reasonable cost to meet its financial
obligations when they fall due. These liquid assets refer to all-cash or ‘near’ cash resource (for example; deposits with
counter party financial institutions and short-term financial instruments) available to the Bank to accommodate
decreases in liabilities and to fund increases in assets. Liquidity risk usually arises from the mismatching of maturities
of assets and liabilities, significant and sustained losses owing to non-performing loans or from an inadequate
capital base.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse movement in the level of market prices or rates. The key methods
used for identifying and assessing market risk are as follows:
Risk Management
Pengurusan Risiko
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Laporan Tahunan 2007
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Bank Pembangunan
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Risk Identification & Assessment
(a)
Mark-to-market of the Bank’s exposure and comparison against predetermined market risk limits.
(b)
Perform assessment on existing bond and equity and the proposed bond and equity to be acquired for
trading purpose.
(c)
Perform assessment on any borrowings, which are subject to forex risk.
(d)
Review of trends of market movements.
(a)
Establishment of daily counterparty limits for placement of PDS.
(b)
Perform simulations to determine the impact of changes in risk profile within current market condition.
(c)
Regular reporting of risk profile to relevant committees.
Risk Control & Monitoring
Functional Structure
Group Treasury undertakes the implementation of control measures with the involvement of Money Market & Bond
Dealing function of the Bank.
In identifying and assessing market risk, Group ALM Support (effective March 3, 2008, Group ALM Support is known
as Market Risk) involves in preparing, analyzing, monitoring and forecasting by way of simulations, which would
reflect the impact of various possible changes of each risk profile within current market conditions and also Balance
Sheet and Income Statement of the Bank and Group. Market Risk function proposes and recommends the needed
mitigations and alternative actions to adhere to internal limits of the Bank and Group. Presently, the focus is on Daily
Counterparty Limits.
Market Risk reports the risk profile of the Bank and Group via Monthly ALM and Market Risk Report to the Board of
Directors, Risk Management Committee (RMC) and other relevant committees of the Bank and Group.
The Bank continues the initiatives to enhance market risk management and to identify new needs in market risk
management to be in line with the need to monitor the risk more prudently and dynamically.
INTEREST RATE RISK MANAGEMENT
All interest rate related assets and liabilities in the Bank are potentially exposed to interest rate risks. The degree of
interest rate risk exposure depends upon the extent to which the Bank is running mismatches. Not withstanding this,
the increase and/or decrease in interest rate requires proper control in order to maintain good margin and spreads,
profitability and long-term viability. The main areas of activities in the Bank which generate potential interest rate
risk management, include rate sensitive liabilities such as ‘set funds’ and ‘non-set’ deposits, including US dollar funds,
fixed deposits placed with third party financial instruments, investments in financial institutions, rate sensitive lending
to customers and other products, business and hedging activities with interest rate contents.
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Risk Identification & Assessment
The key methods in the assessment of interest rate risk include:
Analysing changes in the interest rate and market behaviour or any abnormal event by way of preparing
forecasts and simulations under different interest rate environments.
(b)
Conducting review on the Group’s overall interest rate risk position and related source of risk and develop
an action plan.
Market Risk function shall be empowered to perform the following activities in monitoring interest rate risk:
(a)
Establishment of risk tolerance limit to maintain IRR exposure within self-imposed parameters over a range
of possible changes in interest rates.
(b)
Close monitoring on compliance by Operations and Treasury on the relevant risk indicator limits.
(c)
Close monitoring on compliance to the established minimum spread and net interest margin.
(d)
Recommendation of appropriate corrective measures on any breach of the risk indicator limits.
(e)
Formulating and reviewing strategies to ensure the risk indicator limits are not breached.
Functional Structure
Market Risk is responsible in monitoring and managing the impact from the interest rate movement of the Bank and
Group by establishing a structured and comprehensive framework for an effective risk management by adopting
quality and comprehensive ALM practice. In relation to this, Interest Rate Risk Management Guidelines have been
established that contain a set of rules and guidelines to identify, quantify and control interest rate risk, and at the
same time to focus on the net interest margin and income for profit. The overall purpose is therefore to maintain
safety, soundness and profitability of the Group for both the short and long-term.
For the measurement of interest rate risk, Group Treasury institutes an appropriate system for interest rate risk
management which include analysing and conveying any changes in the interest rate and market behaviour or any
abnormal event by way of preparing forecasts and simulations reflecting the impact of various possible changes in
interest rate and market conditions on the balance sheet and income statement.
To control and monitor the interest rate risk, the Bank has in place an interest rate risk management process, which
regularly reviews the interest rate outlook, including the setting of risk tolerance limit. An important goal of interest
rate risk management is to maintain the interest rate risk exposure within self-imposed parameters over a range of
possible changes in interest rates. To do this, ALCO will establish a system of interest rate risk limits and risk taking
guidelines over time. Such risk limits will require approval from the Board and will be reviewed periodically in line with
market developments and the Bank’s risk appetite. For the Bank, where the current level of banking activities are not
extensive and with limited holdings of financial instruments and derivatives, relatively simple guidelines and limits
may be set which will be determined by ALCO.
Laporan Tahunan 2007
Risk Control & Monitoring
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Bank Pembangunan
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(a)