Risk Management Transparency Report

Transcription

1 Risk Management Transparency Report

2 TRANSPARENCY REPORT On May 23, 2011, the Argentine Central Bank (BCRA) issued Communication A No. 5203, which states risk management guidelines for domestic financial institutions. Accordingly, Banco de la Provincia de Buenos Aires undertook the review and analysis of this Communication for its implementation, and for that purpose, towards the end of September, the Bank hired Pistrelli, Henry Martin y Asociados, a member firm of Ernst & Young Global, responsible for giving its advisory services during this first stage. Therefore, the Bank s Board of Directors resolved to modify its organizational structure and create the Risk Management Department Management which supervises Credit Risk, Operational Risk and Financial Risk Deputy Department Managements and reports directly to the Management Control, Risk Administration and Economic Research Unit. At the same time, the Risk Committee was created and its purpose, duties, internal operation rules and administrative management were established. It is responsible for giving institutional treatment to policies, strategies and procedures related to the Bank s comprehensive risk management and keeping the Board of Directors informed about the current risk exposure status. Considering the basic premise that risk lies at the heart of the banking business and is an integral and unavoidable part of its operations, its main purpose is to preserve the Bank s solvency. A comprehensive understanding of the global risk, its efficient control and management to optimize the yield-to-risk ratio can only be achieved through an integrated management involving the implementation of guidelines, policies and procedures for the identification, measurement, monitoring and mitigation of the different risks faced by the Bank. The Bank s risk-related strategies and policies have been approved and the main aspects of the risks are described below: Page 2 of 13

3 CREDIT RISK Definition Credit Risk refers to the risk of suffering any losses stemming from failure of a debtor or counterparty to meet their contractual obligations. This type of risk is inherent in on- and off-balance sheet transactions, and also involves settlement risk, i.e. the risk that a financial transaction may not be completed or settled as scheduled. Policies and Strategy When designing its credit risk management strategy, Banco de la Provincia de Buenos Aires took into consideration its organizational structure, its role as financial agent of the Province of Buenos Aires, its focus on every social sector throughout the Province (multi-segment institution) and on every need they may have (multi-purpose institution). This translates into a diversified portfolio that helps reduce counterparty risk. The strategy addresses not only the regulatory requirements prevailing in Argentina, but also the requirements established by the authorities that regulate the Bank s branches abroad. Credit Risk management standards are applied to individual financial transactions and all financing facilities in the Bank s portfolios. The assessment of debtors and financings is carried out on a case by case basis upon origination. It contemplates variables such as the limits established in the Bank s Charter, the type of customer and its economic and financial position, the product involved, etc. Subsequent follow-up is also conducted separately and by credit facility. The imposition of overall portfolio limits is also under consideration. To that effect, and as stated in the Business Plan guidelines, the composition, concentration and quality of the different portfolios will be taken into account. This mechanism will be applied when defining new credit products or granting loans under already defined facilities. The Bank s intention is to implement a conservative strategy that may allow it to meet its contractual obligations under normal and adverse market conditions. Page 3 of 13

4 Credit Risk Management System This system refers to the Identification, Measurement, Mitigation and Monitoring of credit risk bearing in mind that such risk is present throughout the lending cycle from loan origination to its final repayment (or recovery/loss, in case of default), involving a series of processes such as: granting, definition of limits, follow-up on individual loans and lending portfolios, internal ratings, stress testing, contingency planning and control of all processes involved. Through this Management System an independent analysis is conducted of all areas prone to credit risk in order to make assessments and recommendations. The assessments based on such analysis provide the framework for producing numerous reports along the credit risk identification, measurement, monitoring and mitigation process; a process that is continuous, iterative and developing. Management Tools The risk measurement models the Bank has in place are detailed below: a) Rating Model Wholesale Portfolio: this model permits to assign ratings to customers included in the wholesale portfolio, which ratings are then used to assess their risk level and the probability of default. b) Scoring Models Consumer Portfolio: the main differences from the above model lie in information sources and the set of variables that are available to estimate customers creditworthiness. From the results obtained and the application of adequate methodologies, Economic Capital is calculated. c) Model Validation: This process intends to verify that models are sound and performing as expected in line with the objectives of the credit risk management system and its components (including methodologies, data, processes, controls and documentation). Structure of Limits - Reports Credit Risk management aims at implementing a process that may define limits: a) At an individual transaction level and by economic group, where they must be below the overall limits (diversification and concentration) established under prevailing regulations. To this effect, limit definitions by transaction, by debtor s total exposure to the Bank and by debtor s economic group will be taken into account. Page 4 of 13

5 b) At a portfolio/product level where limits are determined according to variables such as: Indicators of risk concentration and Adjusted Net Worth of the Bank. Credit Risk reports are submitted to the Senior Management and Risk Committee for information on a monthly basis, detailing the evolution of the main risk management indicators. Page 5 of 13

6 OPERATIONAL RISK Definition Operational risk a concept that includes legal risk and excludes strategic and reputational risk is the risk of suffering any losses derived from the lack of adjustment of or failures in internal processes, from staff s or systems performance or those resulting from external events. Legal risk, which may be internally and externally verified, includes, among other aspects, exposure to sanctions, penalties or economic or other consequences for the non fulfillment of rules and contractual obligations. Policies and Strategy Operational risk is a task assumed by the organization as a whole and intends that processes and procedures be executed within the appropriate levels of risk tolerance and that corrective measures be taken to ensure their efficient management. Actions aimed at fostering the culture of operational risk bank-wide are being developed, and their main aspects are announced to all its personnel by means of internal communications and training programs. Operational Risk Management System This system refers to the Identification, Measurement, Mitigation and Monitoring of operational risk applicable to all activities of the Bank. The Bank implements a framework for Operational Risk Management, which encourages the homogenous treatment of information, clearly assigning administration responsibilities. Management tools The following corporate tools are used to properly comply with the Operational Risk Management process: a) Self-assessment of Operational Risks: It enables to identify critical issues in the operational risk environment and to know the quality of risk management so as to Page 6 of 13

7 improve and strengthen it. This assessment is in charge of the Organizational Units that compose the general structure of the Bank. The identification of operational risks is carried out through Workshops consisting of guided group meetings in order to reach an agreement on existing operational risks and on the controls applicable to them. When an inherent risk level is determined through the combination of risk occurrence (possibility of risk occurrence) and its impact (consequence that such risk may have on the Bank), it is compared with the current control environment in order to obtain the residual risk level, which will have different acceptance levels. When the risk is deemed high or unacceptable, an action plan seeking to mitigate it will be required. b) Report on Events and Losses: Through this tool, officers in charge of the Bank s Organizational and Business Units report losses and/or recoveries caused by operating events. The analysis of operating losses allows analyzing risk assessments and identifying new risks. c) Key Risk Indicators: They are variables or parameters periodically defined and measured by the Bank. Their role is to identify possible sources of operational risks and also to detect trends and changes in the risks assessed. d) Risk Classification or Operational Risk Mapping: It enables to group risks by products. From the information obtained from the remaining tools, it is possible to get a risk map by product/service, by line of business or according to loss event classification. This map allows visualizing risks in order to determine management priorities. Reports on Operational Risk Management The regular submission of reports is essential to ensure an adequate follow-up on the administration of operational risks and, in case of detecting irregularities, to adopt proper corrective measures. Page 7 of 13

8 FINANCIAL RISKS MARKET RISK Definition Market risk is the potential risk of suffering significant losses in on- and off-balance sheet positions due to fluctuations in different factors affecting the market such as: the price of foreign currency, the price of bonds, shares and other regularly listed securities and their implied volatility. Policies and Strategy In line with its corporate values, ethics and transparency principles, when designing its Market Risk Management strategy, Banco de la Provincia de Buenos Aires took into account its organizational structure, the key business lines defined in its Business Plan, the products and diversity of the markets involved in its daily activities and the regulatory requirements applicable to its branches abroad. As a Public Bank, its main lines of business are oriented to Traditional Banking products and services in pursuance of its aim of preserving its financial position from any significant fluctuation in risk factors, keeping its market risk at a reasonable level through the application of prudential limits and thresholds. Market Risk Management System This system refers to the Identification, Measurement, Mitigation and Monitoring of market risk involving a series of processes such as: development of risk assessment models, definition of limits and thresholds, application of prudential valuation criteria for financial instruments, sensitivity analysis, stress testing and contingency planning. Management tools The Value at Risk (VaR) is the standard metric used to measure, through the application of statistical techniques, the maximum risk of loss, in normal market conditions, on a specific position or portfolio for a defined confidence level and over a given time-horizon. The Bank has management tools to monitor the VaR on a daily basis. A follow-up is made on the stock of trading portfolio positions and on the Bank s exposure in different foreign currencies. Page 8 of 13

9 Structure of Limits - Reports The Bank sets out prudential limits on Market Risk levels according to the volume and complexity of its transactions. The defined structure of intermediate limits and thresholds enables Senior Management to take corrective measures when they are reached or surpassed. Market Risk management reports include information about the Bank s trading portfolio, an assessment of the estimated risks in terms of the defined limits, data on risk sharing and position for each financial instrument (bonds, shares and currency) showing the greatest exposures and the concentration level by type, an aggregated and detailed historical evolution as against the previous month and a sensitivity analysis according to specific requirements. Page 9 of 13

10 FINANCIAL RISKS INTEREST RATE RISK Definition Interest rate risk is the risk that the Bank s financial position will change due to fluctuations in interest rates that may have an adverse effect on its net financial income and economic value. Policies and Strategy In line with its corporate values, ethics and transparency principles, when designing its Interest Rate Risk Management strategy, Banco de la Provincia de Buenos Aires took into account its organizational structure, the key business lines defined in its Business Plan, the products and diversity of the markets involved in its daily activities and the regulatory requirements applicable to its branches abroad The Bank aims at preserving its financial position from any significant fluctuation in interest rates, seeking to maintain liquidity and capital adequacy levels in line with its sustainability in the short and long terms. Interest Rate Risk Management System This system refers to the Identification, Measurement, Mitigation and Monitoring of interest rate risk involving a series of processes such as: development of risk assessment models, definition of limits, application of prudential valuation criteria for financial instruments, sensitivity analysis, stress testing and contingency planning. Management Tools The Bank has tools to monitor and analyze capital requirements for Interest Rate Risk under the BCRA rules on minimum capital requirements. According to such regulations, the minimum capital requirement for Interest Rate Risk is determined by calculating, under the Net Present Value methodology, the flows of funds in pesos, in foreign currency and those related to instruments updated by the CER index. The Bank performs sensitivity analyses upon changes in the Balance Sheet Structure and analyses of impact on capital requirement interest rate variation, and monitors the risk assumed by the institution taking into account the limits fixed according to the pertinent risk tolerance level. Page 10 of 13

11 Structure of Limits - Reports The Bank defines prudential limits on Interest Rate risk levels according to the volume and complexity of its transactions. Reports on Interest Rate Risk Management must be issued on a monthly basis. They shall be produced without delay when the threshold determined is met or any other significant event occurs. Interest Rate Risk management reports include an assessment of the estimated risks according to the defined limits. They also show an aggregated and detailed historical evolution as against the previous month. Page 11 of 13

12 FINANCIAL RISKS LIQUIDITY RISK Definition Liquidity Risk refers to the inability of a financial institution to fund asset increases and meet payment obligations as they become due without suffering significant losses. There are two types of liquidity risk: Funding Liquidity Risk is the risk that a financial institution may not be able to efficiently meet expected and unexpected, current and future cash flows and collateral needs without jeopardizing its daily operations or financial condition and Market Liquidity Risk is the risk that a financial institution may not be able to offset or unwind a position at market price because of inadequate secondary market depth or market disruption. Policies and Strategy A proper management must protect liquidity and financial soundness taking into consideration liquidity needs in normal market conditions and during financial crises. In line with its corporate values, ethics and transparency principles, when designing its liquidity risk management strategy, Banco de la Provincia de Buenos Aires took into account its organizational structure, the key business lines defined in its Business Plan, the products and diversity of the markets involved in its daily activities and the regulatory requirements applicable to its branches abroad. As a Public Bank, its main lines of business are oriented to Traditional Banking products and services. Therefore, the Bank s intention is to implement a conservative liquidity strategy that may allow it to meet its contractual obligations under normal or adverse market conditions. Liquidity Risk Management System This system refers to the Identification, Measurement, Mitigation and Monitoring of liquidity risk, involving a series of processes such as: development of models, risk estimation indicators and ratios, definition of limits and thresholds, application of prudential valuation criteria for financial instruments, sensitivity analysis and stress testing. Page 12 of 13

13 Management Tools The Bank has management tools to monitor liquidity risk indicators on a daily, weekly and monthly basis. These indicators provide comprehensive information that enables detailed monitoring of the evolution of available resources and funding sources, at a contractual and current level (gap analysis). Structure of Limits - Reports The definition of limits is a dynamic process that shows the Bank s risk tolerance level. An adequate structure allows maintaining liquidity risk exposure within the levels determined by Senior Management. The Bank prepares a set of Liquidity Risk reports on a daily, weekly and monthly basis. Page 13 of 13