Friday, July 30, 2010

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Risk is an inherent feature of the Bank’s business and its activities. The extent to which the Bank identifies and manages its risks is critical to its long- term profitability and stability and therefore prudent risk management has become increasingly important in managing the growth of the Bank’s business. 

Credit Risk is one of the major risks faced by the Bank. Credit risk is the risk that if a counterparty defaults or fails to honor its financial obligation as it falls due, a loss will be incurred. It takes into account the probability of involuntary default, where the counterparty does not possess the financial means to repay and strategically defaults or where the counterparty with the ability to repay deliberately defaults. Significant changes in the global economy and the health of a particular industry impacts on credit risk.
Central to the credit risk management processes are the credit policies laid down by the Bank and the development of a comprehensive credit evaluation mechanism.

The administration and management of credit risk is independent of the business units. The Credit Control & Administration Department deals with the credit initiation process and the operational issues relating to the granting of facilities which include the control of security, the loading of limits to the core systems and the provision of reports. The Risk Management Department independently evaluates all credit proposals and monitors industry and sector wide exposures on a regular basis. All overdue advances and excesses are closely monitored.

In general, the Bank’s credit function is evolved around the sixteen Principles for the Management of Credit Risk stipulated by the Basel Committee on Banking Supervision, which are broadly divided into the following four categories:

	Establishing an appropriate credit risk environment,
	Operating under a sound credit granting process,
	Maintain an appropriate credit administration, measurement and monitoring process; and
	Ensuring adequate controls are in place.

Market risk is the risk of losses in on and off balance sheet positions arising from movements in market prices of the underlying assets. As such, the market risk is the risk of changes in the value of the security or transaction due to underlying market exposure relating to the Bank’s trading and banking book. Market risk may arise from movements in interest rates, foreign exchange markets, equity markets or commodity markets. A single transaction or financial product may be subject to any number of risks such as interest rate risk, foreign exchange risk, equity risk and commodity risk, etc.

The risk management philosophy of the Bank is to identify, capture, monitor and manage the various levels of risk with the objective of protecting asset values and income streams such that the interests of the Bank’s depositors and shareholders are safeguarded, while maximizing the returns to shareholders. It is intended at optimizing shareholder return while maintaining the Bank’s risk exposure within self-imposed parameters.

The Bank implements the management of market risks arising from interest and exchange rate volatility. The Bank's foreign exchange exposure is principally from trade and equity investments, treasury trading activities and structural foreign currency transaction exposure. In order to reinforce the Bank's risk management processes, both the back and middle office functions are independent of foreign currency dealing operations.

Interest rate exposure arises from treasury trading activities and structural interest rate exposure from the asset / liability portfolios. The Bank responds to changing market conditions by continuously monitoring and taking action to manage the cost of funding to maintain acceptable margins.

Treasury has responsibility to ensure that exposures are within the approved parameters while Risk Management monitors such exposures on regular basis. Additionally, the ALCO audits the treasury positions and other limits reporting to management on a periodical basis.

The Bank follows the Standardized Measurement Method guidelines of the Central Bank of Bahrain, which is based on the principles stipulated within the Basel II Accord that broadly covers the following standards:

	Risks or gaps are well defined,
	Quantitative assessments are used as much as possible,
	Measures are accurate; and
	Management & control of risks is proactive and integrated.

 

The objective of liquidity management is to maintain adequate levels of liquidity to meet its payment obligations, to take advantage of any investment opportunities and to facilitate the expansion of the business.

The Bank, on the basis of historical data and trend analysis, identifies the potential liquidity risk which it may face. These analyses also take into consideration the future or forecasted events which may affect the Bank’s liquidity status.

Liquidity gaps between cash inflows and outflows in the form of a maturity ladder are calculated. Based on the maturity ladder, a risk management process is defined to safeguard the Bank’s ability in meeting its payment obligations.

The Treasury Department is responsible for managing liquidity in accordance with Bank’s policy. In order to mitigate liquidity risk, the Bank holds a sufficient level of highly liquid marketable assets in addition to adequate cash cushion at all times.

The liquidity management policy entails the identification and continuous monitoring of alternative funding sources to enable the expansion and diversification of the liability portfolio.

In general, the liquidity risk management framework within the Bank is based on the Principles for the Management and Supervision of Liquidity Risk, issued by the Basel Committee on Banking Supervision.

 

Operational risk is associated with human error, system failure and inadequate procedures and controls. It is the risk of loss arising from the potential of inadequate information systems, technology failures, breaches in internal controls, fraud, unforeseen catastrophes, or other operational problems which may result in unexpected losses or reputational issues.

The Bank defines the operational risk as “the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external causes, whether deliberate, accidental or natural”.

Operational risk is mitigated by the implementation of adequate internal controls. The Bank's processes and procedures are under continuous review. Whenever possible, identified operational risks are insured.

The specific operational risks and sources of risks to which the Bank may be exposed to are identified under the operational risk management framework. The Bank uses Risk & Control Self Assessments process to identify potential operational risks. These assessments involve all business units within the Bank exploring potential risks, the controls in place and the residual risks to which the Bank may be exposed. Such exercise also includes assessment of probability / likelihood of occurrence of all possible events and the impact or severity of such incidents. The effectiveness of the controls is also evaluated and the performance of such controls is monitored on regular basis.

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