The bank should establish and communicate risk limits through policies, standards, and/or procedures that define responsibility and authority. These control limits should be meaningful management tools that can be adjusted if conditions or risk tolerances change. The bank should have a process to authorize exceptions or changes to risk limits when they are warranted. Risk […]
Banks should monitor risk levels to ensure timely review of risk positions and limit or policy exceptions. Monitoring reports should be frequent, timely, accurate, and informative, and should be distributed to appropriate individuals that perform oversight functions.
Credit risk. The risk arising from an debtor’s failure to meet the terms of any contract with the bank or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance.
Interest rate risk. The risk arising from movements in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships among different yield curves affecting bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve […]
Liquidity risk. The risk arising from a bank’s inability to meet its obligations when they come due, without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to […]
Price risk (or market risk). The risk arising from changes in the value of portfolios of financial instruments. This risk arises from market-making, dealing, and position-taking activities in interest rate, foreign exchange, equity, and commodities markets.
Operational risk (or Transaction risk). The risk arising from problems with service or product delivery. This risk is a function of internal controls, information systems, human resource issues, and operating processes. Operational risk exists in all products and services.
Risk management has become a key factor in assessing the future performance and condition of a bank and the effectiveness of management. Disclosures may include discussions of overall risk management philosophy, overall policy and methodologies, how risks arise, how risks are managed and controlled, and whether and how derivatives are used to manage risks.
Interest rate risk is the risk of loss resulting from changes in interest rates. It is controlled primarily through the limit structure described in above. Exposure to interest rate movements can be expressed for all interest rate sensitive positions, whether marked to market or subject to accrual accounting, as the impact on their fair values […]
Effective liquidity risk management requires an informed Council, capable management, and appropriate staffing. The Supervisory Council and senior management are responsible for understanding the nature and level of liquidity risk assumed by the bank and the tools used to manage that risk.
