The Bank is exposed to risks that are inherent to its lending and trading businesses and the environment in which it operates. The Bank's goal in risk management is to ensure that it understands, measures and monitors the various risks that arise from its business activities, and that it adheres strictly to the policies and procedures which are established to address these risks.
The Bank employs a committee system as a fundamental part of its process of managing risk. Each committee consists of the Chief Executive Officer/President, and other senior executives. The key committees are as follows:
- The Executive Committee (Excom), which approves exposure management standards, reviews concentrations of credit risk, sets documentation and credit support standards and reviews and approves large counterparty credit limits and consideration of credit-related transactions;
- The Risk Management Committee (Riskcom), which ensures wide portfolio diversification and establishes risk policies;
- The Senior Management Committee (SMC), which oversees all operational and other matters that affect the Bank’s day to day activities and reviews new products and businesses and ensures that policies and procedures are established and in place prior to engaging in new business; and
- Assets and Liabilities Committee (ALCO), which appraises market trends, economic, and political developments and provides strategic direction in the management of interest rate risk, liquidity risk, and trading and investment portfolio decisions.
Major Risks Involved
- Liquidity Risk – risk that there are insufficient funds available to adequately meet all maturing liabilities, including demand deposits and off-balance sheet commitments, due to: (a) inability to liquidate assets or obtain adequate funding and (b) the inability to easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions.
The Bank's liquidity policy is to manage its operations to ensure that funds available are more than adequate to meet credit demands of its customers and to enable deposits to be repaid on demand or upon maturity. The main sources of the Bank's funding are capital, core deposits from retail and commercial clients and wholesale deposits. The Bank also maintains a portfolio of readily marketable securities to further strengthen its liquidity position. The Bank's liquidity policies and procedures are set out in its Funding and Liquidity Plan. At least once annually, the Bank's Treasurer presents a business plan containing a request for liquidity limits to ALCO for final approval and ratification by the Board of Directors. The funding plan effectively serves as a projected funding requirement based on assumptions from the forecasted balance sheet.
To ensure that the Bank has sufficient liquidity at all times, the Bank's Treasury formulates a contingency plan using extreme scenarios of adverse liquidity and evaluates the Bank's ability to withstand these prolonged scenarios. The contingency plan focuses on the Bank's strategy for coordinating managerial action during a crisis and includes procedures for making up cash flow shortfalls in adverse situations. The plan details the amounts of funds available and the scenarios under which it could use them.
- Interest Rate Risk – The Bank follows a policy on managing its assets and liabilities so as to ensure that exposure to fluctuations in interest rates is kept within acceptable limits. The Bank's risk measurement system addresses different risk factors of different categories of instruments within each currency where the Bank holds interest rate sensitive positions.
ALCO meets at least weekly to set rates for various asset and liability and trading products. In pricing interest rates, foreign exchange and fee-based products, ALCO considers funding costs, market conditions, transaction volumes, and competitor’s rates, among others.
The interest rate sensitive instruments of the Bank's trading and investment portfolio are covered by a system of loss limit and Management Action Trigger ("MAT") controls which quantify management’s tolerance for losses on year to date and month to date cumulative loss. In addition, value at risk ("VaR") is computed per product group to determine potential loss.
The Bank employs "gap analysis" to measure the interest rate sensitivity of its assets and liabilities. The asset/liability gap analysis measures, for any given period, any mismatch between the amounts of interest-earning assets and interest-bearing liabilities which would mature, or would be subject to re-pricing, during that period.
- Credit Risk – risk that the borrower, issuer or counterparty in a transaction may default and cause a potential loss to the Bank. The Bank is exposed to credit risk as trading counterparty to dealers and customers, as direct lender and as a holder of securities. Categories of credit risk include contingent credit risk (risk that potential counterparty or customer obligations become actual and will not be repaid on time), country risk (risk that actions of sovereign governments or other uncontrollable events will adversely affect the ability of counterparties or customers to fulfill obligations to the Bank), event risk (risk that the Bank will incur risk in unusual situations which are not captured in the daily risk management tools), underwriting risk (risk that an issue will lose value after launching but before trading in the secondary markets), and custody risk (risk that arises when the Bank has assets in the form of securities entrusted to a third party as a custodian).
The Bank's overall goal of credit risk management is to maximize its risk-adjusted rate of return by maintaining credit risk exposure within approved parameters. The Bank's credit policies are established by the Executive Committee and/or the Board of Directors and are set out in the Bank's Credit Policy Manual.
- Market Risk – risk resulting from adverse movements in the level of or volatility of market rates or prices or commodity/equity prices which will affect the Bank's financial condition. The primary determinant of market risk is the volatility of the relevant market for a business line. The market risks of the Bank are: (a) foreign exchange rates, (b) interest rates, (c) equity prices and (d) commodity prices.
To manage market risks inherent in the Bank’s portfolio, three related measures of risk values are estimated or established:- the sensitivity of the position or portfolio to a movement in the market risk factor to which it is exposed;
- the volatility of the position (the maximum expected movement in the market risk factor for a given time horizon at a specified level of confidence); and
- he value-at-risk (the likely impact on earnings for a given time horizon due to expected movements in the market factors).
- Operations Risk – risk arising from the potential that inadequate information systems, operations or transactional problems (related to service or product delivery), breaches in internal controls, fraud or unforeseen catastrophes will result in unexpected loss. Operations risk includes the risk of loss arising from various types of human or technical error, settlement or payments failures, business interruption, administrative and legal risk issues and systems not performing adequately.
The Bank maintains operations manuals that are periodically updated. The Bank has also developed a Business Contingency Plan which is tested at least annually and updated for any major changes in systems procedures. A complaints log, which is reviewed by management, exists for each business area for logging, monitoring and follow-up on customer complaints.
To ensure that critical transactions are properly handled, the work of one person is verified by another. Items of value are under dual custody.
The Bank places emphasis on the security of its computer system and has a comprehensive IT security policy. The Bank designates a security administrator independent of the front office who is responsible for maintaining strict control over user access privileges to the Bank’s information systems. The Bank's Information Technology Group has a Disaster Recovery Plan to ensure business continuity, recovery of critical data and uninterrupted processing of transactions in the event of a disaster.
- Regulatory Risk – refers to the potential for the Bank to suffer financial loss due to changes in the laws or monetary, tax or other governmental regulations of the country. The Bank's Compliance Program, the implementation of which is overseen and coordinated by the Compliance Office, is the primary control process for regulatory risk issues. The Compliance Office is responsible for communicating and disseminating new rules and regulations to all units, analyzing and addressing compliance issues, performing periodic compliance testing on business centers and Head Office units and reporting compliance findings to the Audit Committee and the Board of Directors. On a case by case basis, when the Audit Committee is not immediately available, the Compliance Officer may initially report urgent matters to the President/Chief Operating Officer or the Chief Executive Officer, and thereafter to the Audit Committee
