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Ebook Risk Management Guidelines For Banking Institutions

Submitted by puput on Mon, 01/25/2010 - 04:20

Risk-taking is an inherent element of banking and, indeed, profits are in part the reward for successful risk taking in business. On the other hand, excessive and poorly managed risk can lead to losses and thus endanger the safety of a bank's depositors. Accordingly, the Reserve Bank of Malawi places significant emphasis on the adequacy of an institution’s management of risk. The Reserve Bank of Malawi puts forward this document for the purpose of providing guidelines to all banking institutions on risk management systems that are expected to be in place.

The document sets out minimum standards that shall be expected of a risk management framework at any banking institution. For the purpose of these guidelines, risk in a banking organization refers to the possibility that the outcome of an action or event could bring adverse impacts on the institution’s capital, earnings or its viability. Such outcomes could either result in direct loss of earnings and erosion of capital or may result in imposition of constraints on a bank’s ability to meet its business objectives. These constraints could hinder a bank’s capability to conduct its business or to take advantage of opportunities that would enhance its business. As such, managers of banking institutions are expected to ensure that the risks an institution is taking are warranted.

Risks are considered warranted when they are understandable, measurable, controllable and within a banking institution’s capacity to readily withstand adverse results. Sound risk management systems enable managers of banking institutions to take risks knowingly, reduce risks where appropriate and strive to prepare for a future, which by its nature cannot be predicted with absolute certainty. Risk Management is a discipline at the core of every banking institution and encompasses all activities that affect its risk profile. Managers of banking institutions should attach considerable importance to improve the ability to identify, measure, monitor and control the overall risks assumed.

The guidelines are in line with internationally accepted risk management principles and best practices. They are also aligned with the revised version of Core Principles for Effective Banking Supervision which the Basel Committee published in October 2006. Core Principle 7 on ‘Risk Management Processes’ requires that banks and banking groups must have comprehensive risk management processes (including Board and senior management oversight) to identify, evaluate, monitor and control or mitigate all material risks and to assess their overall capital adequacy in relation to their risk profile. These processes should be commensurate with the size and complexity of the institution. Other relevant Core Principles (CP) touch on credit risk (CP8), market risk (CP13) liquidity risk (CP14), operational risk (CP15) and interest rate risk (CP16). Whilst the types and degree of risks an organization may be exposed to depend upon a number of factors such as its size, complexity, business activities, volume etc, these guidelines cover the most common risks in banking institutions in Malawi, namely: Strategic Risk, Credit Risk, Liquidity Risk, Interest Rate Risk, Foreign Exchange Rate Risk, Price Risk, Operational Risk, Compliance Risk and Reputation Risk.

CONTENTS

1 INTRODUCTION
1.1 Risk Management Process
1.2 Active Board and Senior Management Oversight
1.3 Adequate Policies, Procedures, and Limits
1.4 Adequate Risk Monitoring and Management Information Systems
1.5 Adequate Internal Controls
1.6 The Risk Management Function
2 STRATEGIC RISK MANAGEMENT GUIDELINES
2.1 Introduction
2.2 Board and Senior Management Oversight

    2.2.1 Board Oversight
    2.2.2 Senior Management Oversight

2.3 Policies, Procedures & Limits
2.4 Risk Monitoring and Management Information System
2.5 Internal Controls and Audit
3 CREDIT RISK MANAGEMENT GUIDELINES
3.1 Introduction
3.2 Board and Senior Management’s Oversight

    3.2.1 Board Oversight
    3.2.2 Delegation of Authority
    3.2.3 Senior Management Oversight

3.3 Credit Strategy, Policies, Procedures and Limits

    3.3.1 Credit Strategy
    3.3.2 Policies
    3.3.3 Limits

2.3.4 Credit Origination

    3.3.4 Approving New Credits and Extension of Existing Credits
    3.3.5 Credit Administration

3.4 Internal Risk Rating Systems
3.5 Managing Problem Credits
3.6 Management Information System
3.7 Internal Controls
3.7.1 Risk review
4 LIQUIDITY RISK MANAGEMENT GUIDELINES
4.1 Introduction
4.2 Board and Senior Management Oversight

    4.2.1 Board Oversight
    4.2.2 Senior Management Oversight
    4.2.3 Liquidity Risk Strategy

4.3 Policies, Procedures and Limits

    4.3.1 Liquidity Policies
    4.3.2 Procedures and Limits

4.4 Risk Measurement, Monitoring and Management Information System

    4.4.1 Measurement and Monitoring of Liquidity Risk
    4.4.2 Foreign Currency Liquidity Management
    4.4.3 Managing Market Access
    4.4.4 Review of Assumptions Utilized in Managing Liquidity
    4.4.5 Stress Testing

4.5 Management Information System
4.6 Internal Controls
5 INTEREST RATE RISK MANAGEMENT GUIDELINES
5.1 Introduction

    5.1.1 Sources of Interest Rate Risk

5.2 Board and Senior Management Oversight

    5.2.1 Board Oversight
    5.2.2 Senior Management Oversight

5.3 Policies, Procedures and Limits

    5.3.1 Policies and procedures
    5.3.2 Limits

5.4 Risk Measurement, Monitoring and Management Information System

    5.4.1 Interest Rate Risk Measurement and Monitoring
    5.4.2 Stress testing
    5.4.3 Management Information Systems

5.5 Internal Controls
5.6 Lines of responsibility and authority
6 FOREIGN EXCHANGE RATE RISK MANAGEMENT GUIDELINES
6.1 Introduction
6.2 Board and Senior Management Oversight
6.3 Policies and Procedures
6.4 Risk Identification, Measurement, Monitoring and Control

    6.4.1 Risk identification
    6.4.2 Risk Measurement
    6.4.3 Risk Limits
    6.4.4 Stress Tests
    6.4.5 Risk Monitoring and Control
    6.4.6 Risk Reporting

6.5 Internal Controls and Independent Audits
7 PRICE RISK MANAGEMENT GUIDELINES
7.1 Introduction
7.2 Board and Senior Management Oversight
7.3 Policies, Procedures and Limits
7.4 Measuring and Monitoring Price Risk
7.5 Management Information System
7.6 Internal Control and Audit
8 OPERATIONAL RISK MANAGEMENT GUIDELINES
8.1 Introduction
8.2 Board and Senior Management Oversight

    8.2.1 Board Oversight
    8.2.2 Senior Management Oversight

8.3 Policies, Procedures and Limits
8.4 Risk Identification, Assessment, Monitoring, Control and Management Information System

    8.4.1 Risk Identification and Assessment
    8.4.2 Risk Monitoring and MIS
    8.4.3 Risk Control/Mitigation

8.5 Internal Control
9 COMPLIANCE RISK MANAGEMENT GUIDELINES
9.1 Introduction

    9.1.1 Compliance Risk Management

9.2 Board and Senior Management Oversight

    9.2.1 Board Oversight
    9.2.2 Senior Management Oversight

9.3 Policies and Procedures

    9.3.1 Compliance Risk Analysis
    9.3.2 Self Assessment
    9.3.3 Risk Maps and Process Flows
    9.3.4 Key Indicators
    9.3.5 Escalation Triggers
    9.3.6 Breach Logs and Near Miss Logs
    9.3.7 Internal Audit Reports
    9.3.8 Front-line Prevention Controls

9.4 Compliance Monitoring and Reporting

    9.4.1 Tools to Manage the Compliance Process

9.5 Legal Risk

    9.5.1 Policies and Procedures

10 REPUTATION RISK MANAGEMENT GUIDELINES
10.1 Introduction
10.2 Policies and Procedures
10.3 Reputation Risk Management and Monitoring
10.4 Risk Methodology Components
10.5 Reputation Risk Analysis Methodology and Process
10.6 Roles and responsibilities

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