Daily Value at Risk

Daily value at risk is an estimate of the potential loss that might arise from unfavourable market movements if current positions were to be held unchanged for one business day, measured to a confidence level of 99%. This is to guard against incidence of significant market movement, consequently improving management transparency and control of the market risk profile. Daily losses exceeding the daily value at risk figure are likely to occur, on average, five times in every 100 business days.

 Most financial institution uses an internal daily value at risk model based on the historical simulation method. This internal model is also used for measuring value at risk over both a one-day and 10-day holding period at a 99% confidence level for regulatory back testing and regulatory capital calculation purposes respectively. This model covers general market position risk across all approved interest rate, foreign exchange, commodity, equity and traded credit products

There are a number of considerations that should be taken into account when reviewing daily value at risk numbers. Namely:

Historical simulation assumes that the past is a good representation of the future. This may not always be the case.

The assumed time horizon will not fully capture the market risk of positions that cannot be close out or hedge within this time horizon.

Daily value at risk does not indicate the potential loss beyond the selected percentile.

Intra-day risk is not capture.

Credit Process

Bank’s credit starts with portfolio planning and target market identification. Within identified target markets, credits are initiated by relationship managers. The proposed credits are subjected to review an approval by applicable credit approval authorities. Further to appropriate approval, loans are disbursed to beneficiaries. Management of loans is undertaken by both relationship management teams and credit risk management group.

   If a preliminary analysis of a loan request by the account manager indicates that it merit further scrutiny, it is then analyze in greater detail by the account manager, with further detailed review by credit risk management. The concurrence of credit risk management must be obtained for any credit extension. If the loan application passes the detailed analysis it is then submitted to the appropriate approval authority for the size of facilities.

The standard credit evaluation process is based both on quantitative figures from the financial statements and on an array of qualitative factors. Factual information on the borrower is collected as well as pertinent macroeconomic data, such as an outlook for relevant sector, etc. These subjective factors are assessed by the analyst and all individuals involved in the credit approval process, relying not only on quantitative factors but also on extension knowledge of the company in question and its management.

Control Issues

A control issues is define as any aspect of the design, implementation or operation of a control that could result in the control objective not being achieved. A control objective is a statement that clearly describes what the control has been designed to achieve and refer to a control that require strengthening or one that requires implementation due to a change in business risk appetite. Failure of a control can cause an event that leads to a financial loss or non-financial impact for the business. CIs identified are managed and reported via a robust governance process.

Credit Risk Management.

Credit risk arises from the failure of an obligor of a bank to repay principal or interest at the stipulated time or failure otherwise to perform as agreed. The risk is compounded if the collateral only partly covers the claims made to the borrower, or if its valuation is exposed to frequent changes due to changing market conditions (i.e market risk).

The goal of a bank is to apply sophisticated but realistic credit models and systems to monitor and manage credit risk. Ultimately these credit models and systems are the foundation for the application of internal rating based approach to calculation of capital requirements. The development, implementation and application these models are guided by a bank base strategy.

A bank may, implements a consistent pricing model for loans to its different target markets. Also a client interest is guarded at all times, and collateral quality is never the sole reason for a positive credit decision.

Risk Appetite

Risk appetite is an articulation and allocation of the risk capacity or quantum of risk firm is willing to accept in pursuit of its strategy, duly set and monitored by groups of bodies. Risk appetite reflects a company’s capacity to sustain potential losses arising from a range of potential outcomes under different stress scenarios.

A firm defines its risk appetite in terms of both volatility of earnings and the maintenance of minimum regulatory capital requirements under stress scenarios. Risk appetite can be express in terms of how much variability of return a bank is, prepared to accept in order to achieve a desired level of result. It is determined by considering the relationship between risk and return.

We measure and express risk appetite qualitatively and in terms of quantitative risk metrics. The quantitative metrics include earnings at risk (or earnings volatility) and , related to this, the chance of regulatory insolvency, chance of experiencing a loss and economic capital adequacy.

Strategy and Business Planning.

Risk management is embedded in a business strategy and planning cycle. By setting the business and risk strategy, a company is able to determine appropriate capital allocation and target setting for such companies. All business units are required to consider the risk implications of their annual plans.

These plans include analysis of impact of objectives on risk exposure. A group of experts monitored a business performance regularly focusing both on financial performance and risk exposure. The aim is to continue the process of integrating risk management  into the planning and management process and to facilitate informed decisions.

Through ongoing review, the links between risk appetite, risk management and strategic planning are embedded in the business so that key decisions are made in the context of the risk appetite for each business unit