Local Risk Management Committee

Published Date: 02 Nov 2017

It generally consists of senior board committee and audit committee for tackling & managing the risk and audit. It varies from country to country & organization to organization. Usually, in large banks and organization, it is essential to create a dedicated risk committee with the time & experience require for holistic risk management. Most corporate governance guidelines, explicitly stat the most appropriate place to consider risk depending on the nature & scale of banking operations.

Function/Role of local risk management committee

The following are the functions of risk management committee:-

To identify & acknowledge all kinds of risks faced by banking operations.

Evaluation of the risk by developing a written strategy for managing risk.

Establishing nonprofit risk management goals like customer satisfaction, reducing insurance cost, etc.

To recommend appropriate risk management financing.

Communicate the agency risk management plans to board of directors, general public and employees of the organization.

Selecting the insurance advisor in form of consultant, professional, agents, etc. to negotiate insurance arrangements.

To oversee & prevent losses if applicable.

To prepare annual risk management report to the board of director & shareholder of the bank/company.

Risk Management Process

Source: Oesterreichische National Bank Report on Internal Capital Adequacy Assessment Process

The process of risk management can be divided into five stages. It is known as ICAAP (Internal Capital Adequacy Assessment Process) which is generally followed by banks to ensure the process of capital coverage determine by internal regulations that is sufficient to ensure the banks or institutions fundamental risk exposure & adequate risk management system in accordance with risk factors identified.

The following are the steps to complete the risk management process:

1) Risk Identification

This is the initial stage of risk management process to record as many risks as possible which might create an obstacle in banks goal attainment. It is the most important task as it determines the stage of remaining risk management process. A bank can evaluate independently which risks are relevant to its current & future situation (valuation of all material risks). The bank should also document the results of the risk identification process. Further it is important to define suitable risk measurement methods for the identified role & also to be noted that which data will be necessary for risk quantification. Lastly, the process should be designed by taking into consideration the existing & emergence of new risks arising from different situations.

2) Quantifying Risks & Coverage Capital

The second step in risk management process is quantifying the risk. This step is necessary for all banks & control units to create an objective basis decision making and implementation. Further, it is essential for evaluating the success of individual banks in terms of risk & uncertainty. Also, the banks risk cover depends on the banks earnings for a given year. On the other hand, securities, equity investments, etc. are also prone to business fluctuation in value & this might also change from time to time. Lastly, it is absolutely necessary to account for additional planning capital requirement & available capital to conduct banking operations.

3) Aggregation

After identification & quantification, individual risk also has to be aggregated to determine the overall risk involved in banking operation. Under this process, it is important to note that no risks are omitted completely. The more complex is the banks structure, the more demanding the aggregation process becomes. In this context, process design, data provision, risk management, data quality & transfer, assigned responsibilities are important for completion of process. Along with the other risks, the available risk cover should also be aggregated. Lastly, risk management decisions can be made by comparing banks risk cover with its observed risks.

4) Ex Ante Control

Under this planning process, an operational limit is defined for each control unit. Each bank should have a limit for each control unit that can take on risk. By doing so, bank can prevent certain risky transactions. In case of ex ante control, emergency & backup plans should be drawn up for extreme stress scenario.

5) Risk Monitoring & Ex Post Control

Risk monitoring is the process of ensuring banks risk profile in accordance with the line of risk preferences at all time. In this context, control information can be derived from a routine comparison of the banks actual & target situation. It can be done by setting up standardized procedure for dealing with increasing level of limit utilization & limit overrun. Bank should also periodically monitor risk position which is not quantifiable in risk management process. The following information should also be provided: -

Current solvency ratio.

Economic risks cover for the bank as a whole.

Utilization of overall bank limit.

Overview of control units.

Overview of structural limits

Develop risk status & compare it with previous years.

Scenario analysis & results of stress tests.

Profit & loss risk for the bank.

Profit & Loss risk cover & proposed measures in case of limits where exceeds.

Ex Post Control

The main aim is to influence the risk positions determined in previous stages of risk identification & measurement. Some of the alternatives to achieve these objectives are risk mitigation or transfer, relocation of risk capital & increasing risk coverage capital. This is the last step for the completion of risk management process & the same time beginning of another new process.