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RISK MANAGEMENT |
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In compliance of the Basel II requirements,
in 2005 Futurebank established an independent Risk Management Function embracing the all major risks. |
 Credit Risk |
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Market Risk,
Liquidity Risk, FX Risk
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Operational Risk |
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Over a span little more than of eight years the
Bank has managed to cover various areas of Risk
Management. The overall Risk Management
framework is enunciated through a Risk Charter
which lays down the overall framework of
strategies, infrastructure, policies and
procedures. It also summarizes the committee
structure adopted by the Bank for Management of
Risk. During 2012 a
Board Level Risk Committee ( ERCB )
chaired by an independent director , was set up
in order to assist the Board in its oversight
function. The
Risk Management Committee (RMC)
set up with the representation of Senior
Management, reports to the ERCB. The RMC is
chaired by the CEO and is responsible for day to
day implementation, interpretation and follow up
of the Risk Policies. The Terms of reference of
the Committee broadly include the implementation
of all policies relating to management Credit,
Market liquidity and Operational Risk on an
ongoing basis. There are three sub committees to
specifically monitor Operational Risk Credit
Risk ( Performing Loans ) and SAM ( Special
Asset Management for Non Performing Loans )
respectively. All sub committees report to the
main Risk committee. The Head of Risk reports to
the CEO with a dotted line to the Board.
Based on Central Bank of Bahrain’s (CBB)
guidelines, a risk profiling audit of the Bank
was conducted by an independent external auditor
in 2009 and the report was sent to the CBB.
Based on the gaps identified in the report, the
Bank had submitted a time bound action plan to
the CBB. The RMD followed up on this action plan
and all gaps pointed out in the report since
stand closed. During 2010 the organization
structure was modified in order to elevate the
role of the Risk Management in the Credit
approval process. In addition the credit
analysis function was shifted from front office
to Credit Department in order to ensure
independence of the appraisal function.
The Risk Management Department (RMD)
is responsible for day to day management of Risk
which includes monitoring of portfolio based
limits, reporting all excesses and anomalies to
RMC and follow up with respective front office
representatives for regularization.
Internal audit assesses whether the policies and
procedures are complied with and if necessary,
suggest ways of improving internal controls. A
separate internal control function in place
under the Finance Department and looks after
various internal control issues
The entire initiative and road map of Risk
compliance with Basel II and Basel III
guidelines is being monitored by a
Basel III Steering Committee,
chaired by CEO, which oversees progress of
various projects undertaken for the purpose.
The Bank has also conducted impact analysis
based on the new Basel 3 guidelines which are
applicable from 1.1.2015. Based on the analysis
there will be no adverse impact of the higher
threshold requirements being proposed by CBB
as bank is adequately cushioned in terms of
Tier 1 capital.
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The Risk Management
framework is enunciated through the
Risk Charter
which lays down the structure of strategies,
policies and procedures. It also summarizes the
committee structure adopted by the Bank for
Management of Risk. The Risk Management
Department is responsible for day to day
management of Risk.
The Executive Risk
Committee of the Board (ERCB)
was set up in April 2012 in order to assist the
Board in its Risk oversight function. Its
principal responsibilities are as follows:-
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to oversee implementation of various components of the Credit, Operational
Market and liquidity risk policies, including revision to existing policies and procedures. |
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to establish a sound structure of Risk Management |
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The Risk Management Committee
has been operational to oversee the
implementation, interpretation and follow up of
the Risk policy of the Bank as enunciated in the
Risk Charter.
The Risk Management Committee is chaired by the
CEO and reports to the ERCB. Its principal
responsibilities are as follows:-
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to establish guidelines for all lending activities
based on approve policies. |
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to establish and monitor limits for Country exposure, product, sector, and review them on Annual basis. |
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to conduct portfolio reviews on
quarterly basis to track various risk
concentrations and suggest remedial
measures in case of deviations. |
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to review all exception reports on
regular basis to identify new weal list
and watch list
accounts and recommend appropriate
actions to prevent slippage in ratings. |
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to review Special Assets including
criticized assets at regular intervals
and suggest appropriate remedial
measures to management including work
out or exit. |
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to consider and recommend legal action
against defaulting borrowers based on
assessment of the recovery prospects |
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to consider all
proposals for provisioning globally and
in specific cases |
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to review and assess on Annual basis, the
process and quality of decision-making
carried out by various delegates. |
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to implement established policies and
procedures for liquidity , market and
operational risk management.
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The
risk appetite of the Bank is defined in the
Risk
Strategy
document approved by the Board. Risk Strategy
defines the risk categories to which bank is
willing to expose itself and the levels up to
which it is willing to expose ( limits ) while
undertaking its business, defined under overall
business strategy and the Credit and funding
strategy
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Credit Risk is managed
through a set of
Credit Risk Policy
guidelines and the procedures as laid down in
the Credit Risk Policy.
The Credit Risk policy is derived in accordance
with the Risk strategy of the Bank which defines
the Risk appetite of the Bank. The purpose of
Credit Policy is to provide a framework to
achieve the Strategic objectives set by the
Board. It provides the guidelines for approving
credit risk (limits) and, the prudential norms
for managing concentration risk and the
mechanism for monitoring and control as part of
overall self regulation.
The Credit Risk policy document covers all
credit activities undertaken by the business
segments including non-strategic investments (
counterparty risk )
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In addition to liquidity Risk Future Bank is
currently exposed to Market Risk only in the
Banking Book since it is not engaged in any
trading activities.
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Interest Rate Risk (risk of
loss due to changes in interest rates)
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Exchange Rate Risk
(risk of loss due to changes in exchange rates)
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Liquidity Risk
(risk of Bank failing to meet its financial
commitments due to funding mismatch.)
In
addition to the above Bank is also exposed to
indirect market risk in its credit portfolio due
to lending against IRR deposits and TSE listed
shares.
Any fluctuations in the IRR rate or the TSE
index affects the valuation of our security
related to such lending. This risk is being
regularly monitored by RMC. |
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Limits are in place to manage liquidity,
interest rate and FX (open position) risk.
The Treasury Department
is currently utilizing these limits and
RMD monitors them through
the mechanism of
ALCO
based on the
ALM policy.
The ALM Manager
reports to Head of Risk and assists in preparing
ALCO reports.
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Operational risk (OR) is the risk of direct or
indirect loss resulting from failed processes,
technology, people or external events. It
includes reputation risk. The Bank has put in
place Standard Operating procedures which comply
with the high standards of Internal Control. In
the process, the activities have been segregated
into back office and front office in accordance
with international best practices.
The information security policy is supported by
ISO 27001 standard.
The MIS is being strengthened with particular
focus on exception management. The Internal
Audit Department is considered as the final
layer of Internal Control and reports directly
to the Board of Directors.
The Bank has put in place Standard Operating
Procedures (SOPs) which comply with the high
standards of internal control. In the process,
the activities have been segregated into back
office and front office in accordance with
international best practices. During 2010,
the SOPs were re-engineered in order to reflect
the changes required through implementation of
a new Core Banking module.RCSA exercise is
conducted at regular intervals.
A Business Continuity plan is in place and is
annually reviewed, in order to ensure continuity
of essential services to customers in case of
occurrence of any calamity resulting in disruption
of normal business activity. Similarly, a disaster
recovery infrastructure for system recovery is in
place and was also tested. The Bank has set up an
alternate BCP site which was also tested in April 2014.
An
Operational risk management policy
and procedure framework has been adopted which
defines key operational risk areas, key control
standards and key risk indicators in line with
the Basel II recommendations. The Bank currently
follows the basic indicator approach for
operational risk.
The operational risk sub committee
is in charge of implementation of the OR policy
and reports to the RMC. The RMD implements OR
procedures. Dedicated software is in place to
monitor Operational Risk.
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The Bank follows standardized approach for
credit and market risks and the basic indicator
approach for operational risk. A capital
management policy has been approved by the Board
under which the Bank has defined threshold limits
for capital adequacy ratio with a minimum capital
requirement ratio of 12% (same as required by
the CBB) and a maximum threshold level. Within
this range, 3 trigger ratios are defined i.e.
internal target ratio, lower trigger ratio,
and ICAAP capital adequacy ratio to enable the
Bank to assess the adequacy of the capital to
support current and future activities. Action
points are triggered in case of breach of any of
the lower trigger ratios. The ICAAP capital
adequacy ratio represents the capital position
which the Bank will maintain as buffer over 12%
to accommodate any capital requirements under
Pillar II and effects of stress test on the level
of capital required. In order to manage the
Pillar II risks the Bank has adopted risk
diversification policies by geographic, sector,
rating classifications. Stress tests are performed
at annual intervals based on 3 year projections
and reported to the Board.
For example the geographic areas are broken into
six categories under the country risk management
policy based on country ratings. Exposure limits
have been set up on each category. Similarly
sector limits and rating wise limits have been
defined under the credit risk policy to avoid
concentration risk. Currently the geographic
risk is concentrated to one country i.e. Iran
apart from Bahrain.
The Bank follows the CBBs definition of large
exposure limits and all credit approvals are
based on adherence to the maximum limit of 15%
of capital base except those specifically
approved by the CBB. All large exposures are
monitored by the RMD on a daily basis and a
report is presented to the Risk Committee on a
monthly basis. Certain sensitive exposures such
as connected party exposure and Iran exposure
are monitored on a daily basis.
Any credit obligation which remains unpaid on
the due date is considered as past due on the
next succeeding day. All past dues are closely
monitored through daily and monthly reports. The
rating model adopted by the Bank automatically
downgrades an account to weak list (rating E+)
or watch list (rating E) depending upon the
length of the past dues. An account is
downgraded to impaired asset if the past due
status extends beyond 90 days. Provisions are
made based on IAS 39 requirements.
In addition high value NPAs are subjected to
quarterly revaluation of security based on 3
independent valuations and the Net Present Value
(NPV) is based on 4 years discounting of the
lowest value in order to ensure that all
provisions are made on a conservative basis. The
Bank has adopted a policy of minimum 15%
provision on all NPAs irrespective of the
availability of collaterals or cash flows. In
addition, 100% provision is made in respect of
any NPA with a gross exposure up to BD 100
thousand. The Bank also follows a cooling period
of 6 months satisfactory performance before
upgrading any restructured asset to performing
category. During 2013, the Bank has raised the
level of provisioning to 100% on all
Non-Performing assets irrespective of the sub
category.
A collective impairment provision is also
maintained as additional cushion based on
the PDs for each rating category. Since the Bank
does not have its own PDs in the absence of
adequate historical data, the PDs of external
rating agencies have been mapped to the Banks
internal rating categories on a best effort basis.
The CIP so arrived at is subject to a minimum
amount of 1% of performing loans portfolio i.e.
higher of the two methodologies.
In order to minimize potential legal risks,
the Bank has adopted best practices in lending
activities especially in the area of consumer
lending which includes dissemination of
information relating to products, tariffs etc.
through various media including website,
literature and documentation, complaint disposal
mechanism, staff training etc. There were no
material legal claims against the Bank as of
31 December 2014. An independent Compliance
department is functional which monitors
the compliance risk.
The Bank has adopted a policy for conducting
stress testing on various portfolios in order
to determine additional capital requirements
as part of its ICAAP. Bank has already
stressed its projected 3 year balance sheet
based on 9 stress scenarios and arrived at
the regulatory and internal capital ratios.
The results were in principle approved by
the Board and forwarded also to CBB
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In
line with CBB guidelines the Bank has put in
place a
Disclosure Policy
approved by its board. The policy defines a
framework for the disclosure obligations
including a committee established to oversee the
entire process. |
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