risk management in malaysian commercial banks

57 downloads 395 Views 239KB Size Report
Stress testing becomean essential method that exams the elasticity of ... byMalaysian banks.Besides VaR is useful, institutions employ other tools such as stress.
RISK MANAGEMENT IN MALAYSIAN COMMERCIAL BANKS AUYONG Hui-Nee1

ABSTRACT The main purpose of this study is to examine the risk management practices used by Malaysian banks. A content analysis was conducted to 9 commercial banks listed in Bursa Malaysia. This study tries to ascertain the transparency and public disclosure and th the Malaysian banks have implemented some effective risk strategies and risk management frameworks. In addition, the credit risk exposure methods are still underused by the Malaysian banks. Similarly, collateral and guarantees continue to be the most commonly used risk mitigation methods to provide support to credit facilities in Malaysian banks. The paper discusses and analyses the current practices in risk management of Malaysian banks. It identifies the tools used in managing credit risk, market risk, liquidity risk and operational risk by Malaysian banks. Key words: Malaysian banks, risk management, risk management practices

INTRODUCTION Risk is an uncertain future events that could influence the achievement ofobjectives, and uncertainty includes events caused by ambiguity or a lack of information. In banking institutions, the risk is a major component.Several methods are used to classify the risk. The first is to differentiate betweenfinancial risk and business risk. The business risk is related to the activity of thecompany itself and focuses on the factors affecting the product and / or the market.Financial risk refers to potential losses in the financial markets caused by fluctuationsin financial variables (Jorion and Khoury 1996). It is associated to leverage leading tothe risk that the debts and obligations are not consistent with the elements of theassets (Gleason, 2000). Another way is to decompose the risk on systematic risk andunsystematic risk. Systematic risk is related to the state of the economy incommon, while unsystematic risk is linked to a specific company.Although unsystematic risk can be relieved by diversifying the portfolio, systematicrisk does not improve diversification. Nevertheless, portions of the systematic risk can bereduced through mitigation techniques and risk transfer. In current speedy business environment, banks are exposed to a few types of risks: credit risk, liquidity risk, market risk, operational risk, etc. Due to such exposure to various risks, effective risk management isneeded. Managing risk is one of the basic tasks to be executed, once it has beenidentified and known. The focus of good risk management is theidentification and treatment of risks. Its objective is to add maximum sustainable valueto all the activities of the organization IRM (2002).Larger and more profitable banks have lower

1

Universiti Sains Malaysia. [email protected]

908

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

systemic risk and additional equity capital reduces systemic risk only for banks that are constrained by regulatory capital requirements (Lehar, 2004). The global financial crisis was characterized by market volatility, a lack ofliquidity in many financialmarkets and enhanced systemic risk. This trouble hasunderscored the critical importance of risk management. Many institutions arerethinking their risk management governance models. An active role was undertaken inproviding oversight of risk management, establishing the risk management policy andframework and approving the ers need to recognise the limitations of rules-based regulation and restore a more discretionary and holistic approach to risk management (Honohan, 2008). According to Jorion (2009), risk models largely failed due to unknown unknowns which include regulatory and structural changes in capital markets in 2008. He stressed that risk management systems need to be improved and place a greater emphasis on stress tests and scenario analysis, which can only be based on position-based risk measures. He concluded that the Lehman Shock (crisis) has reinforced the importance of risk management. The main motive to adopt risk management does not mean to minimize risk; infact, its purpose is to improve the risk- reward trade off and to avoid probable failure inthe future. Vigorous risk management practices of the bankinginstitutions are important for both financial stability and economic development. Theimprovement of adequate capacity to gauge risks is also essential forbanks to successfully accomplish their positions in financing economic activities.Risk management is the identification, assessment, and prioritization of risksfollowed by coordinated and economical application of resources to minimize, monitor,and control the probability and/or impact of unfortunate events or to maximize therealization of opportunities.As prudential rules applied by banking institutions are lagging behind compared tointernational standards, work has been undertaken by the Bank Negara Malaysia (BNM) for the implementation of Basel III in the Malaysian banking sector. The application of prudential arrangements aimed to improve the culture of risk in Malaysian banks and promotion of rules and practices of good governance. The Bank of International Settlements (BIS) introduced an enhanced framework for capital adequacy regulation through Basel IIcomprisingthree pillars. The first pillar provides a minimum capital measurement framework for credit and operational risks. The second pillar focuses on strengthening the supervisory process, particularly in assessing the quality of risk management in the banking institutions. The third pillar specifies minimum disclosure requirements on capital adequacy to enhance market discipline. The first phase began in January 2008 where all banks will adopt the standardized approach for credit risks and basic indicator approach for operational risks. The second phase of implementation commenced in January 2010 and banking institutions are required to submit parallel calculation of capital adequacy (BNM, 2008). The Asian Financial Crisis 1997-1998 has drawn attention the shortcomings of the banking sector and also the weaknesses of Malaysian corporate governance practice.The rate of BNM net non-performing loans (NPLs) was relatively high at 13.2% in 1997-1998 (Ibrahim, 2011). In a research to study the significance of implementing the code and rules of corporate governance, Abidin and Ahmad (2007) selected three companies, Perwaja, Renong (now part of the UEM Group) and Malaysian Airline System (MAS) (also known as 909

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Malaysian Airlines now). Abidin and Ahmad (2007) argued that the state ownership in all the three companies created close relationship between business and politics, and that this could easily cause fraud and corruption in the trustee system and offer much freedom to the businessman to act above the corporate law. They found that Perwaja had not only failed to gain any profit since incorporation, but suffered losses of RM2.95 billion and at the same time owed banks another RM7 billion. Perwaja was also facing colligations of corruption and mismanagement in tender and contract awarding.In another case, the problems happened in Renong has revealed the malpractice of corporate governance. The Asian Financial Crisis which led to Ringgit depreciation. It has also increased the amount of Renong accumulated debt between RM20 28 billion which constituted more than 5% of loans by Malaysian banking systems (Gomez, 2002: 102; Thomas, 2002: 154). While in the third case, MAS was also faced with internal management problems. Prior to the Asian Financial Crisis, MAS had already suffered huge debts caused by the management under Tajudin Ramli. This had put MAS at risk during the crisis as all their transactions were done in US dollars.Consequently, the Asian Financial Crisis affected both MAS and Tajudin badly due to the significant increase in debts.As a result, Abidin and Ahmad (2007) found that companies which are involved in corporate malpractice but have good relationship with states will always be excluded from the legal corporate action. The Asian Financial Crisis is led government to adopt corporate reforms. Since1998, government and private sector had chosen to enhance the corporate law inorder to improve the level of corporate governance in the country.The Malaysian Code on Corporate Governance (Code), first issued in March 2000, marked a significant milestone in corporate governance reform in Malaysia. The code of corporate governance, which included the principles and best practices in the corporate governance, were established for the corporate participants. This code essentially aimed to encourage transparency management of a company. The Code was later revised in 2007 (2007 Code) to strengthen the roles and responsibilities of the board of directors, audit committee and the internal audit function. The Bursa Malaysia and Securities Commission (SC) had gazetted new rules for the public listed companies. They were required to disclose their financial status, shareholders structure and loan position on a quarterly basis. A company's manager is subjected to penalty or jail sentence if they fail to comply with the rules. The Malaysian Code on Corporate Governance 2012 (MCCG 2012) focuses on strengthening board structure and composition recognising the role of directors as active and responsible fiduciaries. They have a duty to be effective stewards and guardians of the company, not just in setting strategic direction and overseeing the conduct of business, but also in ensuring that the company conducts itself in compliance with laws and ethical values, and maintains an effective governance structure to ensure the appropriate management of risks and level of internal controls. (Securities Commission, 2012) Malaysian Institute of Corporate Governance (MICG) was established in March 1998 following recommendation by the High Level Finance Committee on Corporate Governance. It is a non-profit public company limited by guarantee, with founding members consisting of the Federation of Public Listed Companies (FPLC), Malaysian institute of Accountants (MIA), Malaysian Association of Certified Public Accountants (MICPA), Malaysian institute of Chartered Secretaries and Administrators (MAICSA), and Malaysian Institute of Directors practice of good corporate governance in Malaysia. The government had granted a warrant amounting to US$100,000 to MICG to conduct research and training program in order to improve the corporate governance standard and quality.In August 2000, Minority Shareholder Watchdog Group 910

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

was established as a government initiative toencourage the company to comply with the principles of corporate governanceand to improve the awareness among the minority shareholder about their rightsand the appropriate methods to enforce their rights, also as part of a broader capital market framework to protect the interests of minority shareholders through shareholder activism. According to Ibrahim (2011), following the Asian financial crisis, the concerted efforts taken by the Bank Negara Malaysia (BNM) to enhance the credit risk management infrastructure and underwriting practices, and attributed to banking institutions that have been actively managing their balance sheets and asset quality through stringent provisioning policies and write-offs of irrecoverable loans, the net NPL ratio improved to 2.1% as at September 2009 from 4.6% recorded at the beginning of 2007. As a result, the financing loss coverage ratio for the banking system as a whole rose to about 90% of NPLs as at September 2009 (199798: 55.1%). In March 1, 2013, BNM issued guidelines on Risk Governance (RG). The guideline is the final piece of the jigsaw in bringing together the other guidelines on risks into a complete and cohesive risk management framework. One of the key principles underlying the RG guidelines is the creation of a Chief Risk Officer (CRO) role. As expected, results from Aebi, Sabato, and Schmid (2011) indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns, ROA, and ROE during the crisis. Hence, Malaysian banks should further implement a vigorous framework that ensures stringent control to manage with any situation of stress. Financial institutions should alert that the risk management is needed to face against crisis. The present study analyses the riskmanagement practices of Malaysian banks. It identifies the tools and methods used in managingcredit risk, market risk, liquidity risk and operational risk by Malaysian banks. LITERATURE REVIEW

Risk management in Banks has attracted deep interest from the academics; there are quite a number of researches have looked from the theory into the riskmanagement practice within the banking sector as well as corporate world especially as an aftereffect of landmark cases e.g. the Bankruptcy of Orange County (1994), the Asian Financial Crisis (1997), the Bankruptcy of Lehman Brothers (2008). Refer Table 1 for an overview of the number of banking institutions under the purview of Bank Negara Malaysia as at 12 November 2013. The Malaysian banking system comprises of commercial banks, international / Islamic banks and investment banks. Table 1. List of Licensed Banking Institutions in Malaysia (As of 12 November 2013) Banking Institution

MalaysianControlled Institution (L)

ForeignControlled Institution (F)

Total

Commercial Banks

8

19

27

911

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Islamic Banks

10

6

16

International Islamic Banks

0

56

56

Investment Banks

13

0

13

Source: Bank Negara Malaysia The Malaysian banking landscape includes twenty-nine bank centred around theCentral Bank of Malaysia or Bank Negara Malaysia (BNM). These banks are divided into 8 local commercial banks (all 8 are listedon the Bursa Malaysia),19 foreign-controlled commercial banks, 16 Islamic banks, 56 international Islamic banks (all foreign-controlled) and 13 investment banks (all local Malaysian-controlled). The study includes all 8 Bursa Malaysia listed local commercial banks. The content analysis wasconducted in March 2014. This study provides a portrait of the state of risk management in Malaysian banks through content analysis of respective annual reports 2013. RESEARCH FINDINGS

This section presents the findings obtained from the content analysis. Theseresults covered in four sub-sections: credit risk management, market risk management,operational risk management and liquidity risk management e process whereby organizations methodically address the risksassociated to their activities with the aim to achieve sustained benefit. The requirement for enhanced riskmanagement has made banks to adopt suitable techniques. Banks have set up a committeethat is responsible for identifying, monitoring, and controlling different types of risks. The Malaysian banksestablished some appropriate risk management environment. This practices wasadopted essentially by the banks.Economic capital reflects an institutio profile and hence is animportant tool for allocating capital and for assessing risk-adjusted performance(DELOITTE 2011). Largerinstitutions understand and calculate the economic capital associated with each of the major risktypes they face. The results in Table 2show that the Malaysian banks have implemented or are inthe midst of implementing mechanisms for economic capital calculation for major risk such as credit risk,market risk and liquidity risk. Credit risk management

Credit risk is among the largest risk that banks face. Credit risk arisesdue to bank borrowers may not be able to fulfiltheir contractual obligations. This concept and the features of a sound credit riskmanagement process are discussed in the Basel II. The main objective of theframework is to further strengthen the soundness and stability of the internationalbanking system via better risk management, by bringing regulatory capitalrequirements more in line with current bank good practices.The foundation of credit risk management is the establishment of aframework that defines corporate priorities, loan approval process, and credit riskrating system; risk adjusted pricing system, loan-review mechanism andcomprehensive reporting system (David, 1997). Credit risk management function has extended its focus toinclude both issuer and counterparty risk as a result of write-down 912

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

(losses) in theirinvestment and trading portfolios. Stress testing becomean essential method that exams the elasticity of the banking institutions vis-à-vis adverseeconomic and market conditions. It is a tool tomake measures to cope with possible events. Stress testing credit risk is anessential element of the Basel II framework. Market risk management

In implementing Basel II, several institutions were employing a range ofapproaches to comply. In managing market risk in the wake of the turmoil in the financial markets,Basel Committee on Banking Supervision proposed in 1995 allowing banks tocalculate their capital requirement for market risk with their own value at risk models,using certain parameters provided by the committee. VaR is a measure of the worstexpected loss that a firm may suffer over a period of time that has been specified bythe user, under normal market conditions and a specified level of confidence.Value at risk (VaR) has been considered as the long accepted methodology forassessing market risk; it has been widely indispensable tool to control financial risks (Jorion accuracy of the VaR forecasts.In this current survey, market VaR is extensively used byMalaysian banks.Besides VaR is useful, institutions employ other tools such as stress tests andscenario analysis to assess market risk. Basel Committee states that stress testingsupply a complementary and independent risk perspective to other risk managementtools like value-at-risk. Stress test must complement risk management practices basedon complex and quantitative models. It allows of possible events by consideringpotential large moves in market prices, volatility, leverage and time needed to liquidateassets. Operational risk management

Basel Committee believes that operational risk is a significant risk for banksand that they must hold capital to protect against losses arising. Basel II includes twosimple approaches for operational risk (Basic Indicator and Standardized approach) forbanks less exposed to operational risk. These approaches require banks to holdoperational risk capital charge calculated as a fixed percentage of a measure of riskdetermined. Therefore, Basel Committee gives banks unprecedented flexibility to developapproach to calculate the capital requirement for operational risk corresponding to theirbusiness profile and underlying risks: the advanced measurement approach. The 2008 global financial crisis movedthe preparation of the New Basel CapitalAccord, known as Basel III, higher up onthe global regulatory agenda.In September 2010, regulators frommajor countries around the worldapproved and released Basel III. At theSeoul Summit in November 2010, theG20 discussed collaborative riskmanagement and agreed, in principle, onthe Basel III regime.Compared to Basel II, Basel III includesthe following changes (Chan, Wan, and Yang, 2011): dpositions, trading accounts, andderivatives measurement -

913

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

ed minimumliquidity criteria to cover liquidity riskthat was not addressed by Basel II institutionshave on the global economic systemwhen they are in trouble. Liquidity risk management

Liquidity risk is among the major risks faced by banking institutions. It involves fund increases in assets, manageunplanned changes in funding sources and to meet obligations when required, withoutincurring additional costs or inducing a cash flow crisis. Recent global financial crisisexposed major weaknesses in the functioning of the global financial system. Thedifficulties experienced by some banks were due to lapses in basic principles ofliquidity risk management. In response, as the foundation of its liquidity framework, theCommittee of Basel in 2008 published Principles for Sound Liquidity Risk Managementand Supervision. The objective of the reform is to strengthen global capital and liquidityregulations with the goal of promoting a more resilient banking sector, and toaccumulate an adequate cushion of high-quality liquid assets to enable an institution tosurvive. More and more banking institutions are concentrating on liquidity risk management policies, tools andprocedures.Banks that relied more heavily on core deposit and equity capital financing stable sources of financing continued to lend relative to other banks. Banks that held more illiquid assets on their balance sheets, in contrast, increased asset liquidity and reduced lending. Off-balance-sheet liquidity risk materialized on the balance sheet and constrained new credit origination as increased take down demand displaced lending capacity (Cornett, McNutt, Strahan and Tehranian, 2011). On the other hand, the goal of achieving transparency has become even further challenging Committeedefine transparency as public disclosure of reliable and timely information that keepsmarket participants better informed about the way a bank is managed and governed.Transparency enables users of information to make an accurate assessment of riskmanagement practices (Basel Committee on Banking Supervision [BCBS], 1998).Pillar 3 of Basel II for enhancing transparency in banking postulate that that marketdiscipline can be the situation where banks control their risk, enhancingtransparency may be beneficial that transparency may force banks to behavemore prudently. BNM has issued the Capital Adequacy Framework which includes the components and the requirement outlined under Basel III. Generally, the implementation of the Basel III guidelines aims to strengthen the capital components of banking institutions in order to be more resilient to financial stress. The main requirements under Basel III include: Higher minimum common equity and Tier-1 capital, Capital conservation and counter-cyclical buffer, Leverage ratio, and Phasing out of certain types of capital instruments. The Basel III Tier I equity ratio, Tier I capital ratio and total capital ratio requirements are 7.0%, 8.5% and 10.5% respectively. BNM has announced that these additional requirements (in addition to Basel II) shall be implemented in phases, starting from 2013, with full adoption scheduled in 2019. The implementation of Basel III in Malaysia commenced with effect from 1 January 2013 under the new Basel III rules released on 28 November 2012 by Bank Negara Malaysia. The Basel III Liquidity Coverage Ratio (LCR) compliance by 1 January 2015 while 914

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

considering the requirements for the Net Stable Funding Ratio (NSFR), which comes into effect from 1 January 2018. Table 2. Risk Management of Key Financial Risks Bank Credit Risk Market Risk Liquidity Risk Mayba nk

- Group Collateral Management System (GCMS)facilitates revaluation of specific eligible collaterals for the use as credit risk mitigation.

- Achieved risk diversification effect in global Value-at-Risk (VaR) computation via the upgraded Kondor Global Risk engine at all Global Market Centres.

- Liquidity risk appetite is approved by the RMC while ERC and ALCO are responsible for controls.

Operational Risk - Group operational risk Management committee (GorMc) caters specifically to operational risk matters.

- The Group is cost diligent in its pursuit to adopt The Standardised - Capital base per Approach (TSA) for the standards of Operational Risk Basel III remained Capital Charge strong with Calculation. Common Equity Tier I Capital ratio at 11.25%. - Optimise structure.

With a 15.66% total capital ratio, sufficient capital to meet Basel III requirements. CIMB

- The Credit Risk - The Market Centre of Risk Centre of Excellence is Excellence dedicated to the reviews treasury assessment, trading measurement and strategies, monitoring of analyses credit risk. positions and activities vis-à- It ensures a vis changes in homogenous and the financial consistent market and approach: performs markto-market valuation. Policies and Procedures; It also coordinates capital market 915

The Group maintains large buffers of liquidity throughout the year. - The day-to-day responsibility is delegated to the respective Country Asset Liability Management Committee (Country ALCO).

- The Operational Risk Centre of Excellence provides the methodology and process.

The Group manages operational risks through key measures i.e. sound risk management practices in accordance with Basel II, board and Management senior management Action Triggers oversight, well(MATs) have been defined responsibilities for

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Models;

product deployments.

Methodologies; and

- The Group also adopts a valueat-risk (VAR) approach in the measurement of market risk.

Analytics.

Public Bank Berha d

- Including credit concentration risk, counterparty credit risk and country risk. The RM processes are strong credit culture, established credit risk policies, clearly defined discretionary powers, periodic review of credit risk rating score sheet and credit concentration model.

established.

The RM processes are review of economic conditions and implications, established market risk policies, prohibition of derivative trading activities, periodic assessment and edging of interest rate and foreign exchange risk.

CET 1, Tier 1 and Total Capital ratios stood at 9.65%, 11.55% and 12.91% respectively.

all personnel concerned, establishment of a risk management culture, and deployment of operational risk management (ORM) systems and tools

The RM processes are pursue growth of core customer deposits, accumulation of liquefiable assets, secure long-term funds, subsidiaries, and liquidity stress test.

- The RM processes are day-to-day management of operational risk through comprehensive system of internal control, new product or service introduced are subject to a product evaluation process, tools are applied to - Issued a total of identify and mange RM1.95 billion of operational risk. Basel IIICompliant Subordinated Medium Term Notes. - Has common equity Tier I capital ratio, Tier I capital ratio and total capital ratio of 8.8%, 10.5% and 13.8% respectively.

RHB

- Group Credit - Group Asset Committee. and Liabilities Committee - Credit risk is (ALCO). mitigated by: - Market risk measures systematic credit include checking and conventional risk processing. quantification

- Group Assets & - The operational Liabilities risk management Management framework of the Committee. Banking Group comprises a broad - The Banking range of activities and element, performs a critical broadly classified role in the into: management of

916

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

structure. adequacy collateral.

methodologies such as risk factor sensitivity analysis and of value-at-risk (VaR) measures.

of upfront payment for purchase positions.

liquidity risks. Enhancement - In preparation for the impending implementation of Awareness Basel III, additional RM750 million sub-notes Intervention and USD500 million senior debt securities were issued.

clients from trading once their accounts are overdue. Hong Leong Bank

- The Bank places high emphasis on effective credit risk management.

- Market risk is primarily controlled via a series of cut-loss limits and - Credit evaluation potential loss is managed by experienced personnel. - All significant credit policies are reviewed and approved by the BRMC and Board of Directors respectively. - The maximum exposure to credit risk for financial assets recognised in the statements of financial position.

- Capital levels are consistently strong with Common Equity, Tier 1 and Risk Weighted Capital Ratios at 10.2%, 11.9% and 14.8% respectively.

Management oversight on operational risk management (ORM) and compliance matters are effected through the Operational Risk Management and Compliance - In line with Basel Committee III Liquidity (ORMCC) whilst Framework Board oversight is observation effected through the period, the Bank BRMC. has commenced the reporting of 2 - The results are key liquidity ratios, reported to both the namely the BRMC and the Liquidity Coverage ORMCC.These tools Ratio and the Net are: Stable Funding i) Risk Catalogue Ratio. (RC). ii) Control Self Assessment (CSA). iii) Key Risk Indicators (KRI). iv) Loss Event Reporting (LER).

917

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

AMMB Holdin gs Berha d

ImplementednewP CommencedRis robabilityof Default kEngineReplace DevelopednewRet ailBehaviouralScor ingmodels and enhancedstrategie sforcross- selling.

ect, to be implemented in phases, with Fixed Income moduletoberolle doutinMay2013.

EnhancedAssets& LiabilitiesManage system andinternaladoptio nofBaselIIIliquidityr atiosandtarget.

Enhancedin making loan provisioning and undertaking stress testing. Allianc e Bank

The core policies, together with business segment policies, require the Group to underwrite risks within the scope of risk appetite. - Regular credit reviews and business-specific early warning frameworks facilitate early detection of imminent problems to improve effectiveness of remedial / recovery actions.

IntroducedOperation alRiskAppetite to complement theCreditRiskandMa rket Risk Appetite. Enhanced governance in managing Key Risk Indicators. Continuousprogram mestoenhanceawar enessinBusinessCo ntinuityManagement

- Market and Liquidity risks are governed by the Market Risk Management Framework. Trading activities are governed by prescribed risk limits such as cash limits, sensitivity limits, loss limits and Value-at-Risk limits.

- Liquidity Risk Management Policy and Interest Rate Risk Management Policy.

- Operational Risk Management framework.

Conduct Operational Risk Awareness - Trading activities programmes. are governed by prescribed risk - Risk and Control Assessment limits such as cash Self limits, sensitivity (RCSA). limits, loss limits and Value-at-Risk CSA to test / validate the limits. effectiveness of the controls. - Key Risk Indicator (KRI) to monitor and manage operational risk exposures. - Loss Event Data Collection (LED) to collect and report loss incidents.

Affin Bank

- An independent GRM function, headed by Group Chief Risk Officer

- The Bank is - The Bank adopts - The Bank adopts exposed to the Basic Indicator market risks Liquidity Approach for the from its trading Framework purpose of and investment calculating the 918

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

direct reporting activities. line to BRMC. The Bank market risk establishes management internal lending objective is to limits and related ensure that lending guidelines. market risk is appropriately - The limits include identified, single customer measured, groupings, controlled, connected parties, managed and and geographical reported. and industry segments. exposure to - These risks are market risk monitored stems primarily regularly and the from interest rate limits reviewed. risk and foreign exchange rate - The credit risk risk. exposure for derivative and loan - Value-at-Risk books is managed. to compute the maximum potential loss amount over a specified holding period of a Trading portfolio. - It measures the risk of losses arising from potential adverse movements in interest rates and foreign exchange rates that could affect values of financial instruments.

capital requirement for operational risk.

The Bank employs liquidity The capital risk indicators. requirement is calculated by taking - The risk is measured average annual monthly. gross income over the previous three - Conduct liquidity years. stress tests to gauge resilience in - The Bank gathers, the event of a analyses and funding crisis. reports operational - In addition, the Bank has in place Group Operational the Contingency Risk Management Funding Plan. Committee and Board Risk - The document Management encompasses Committee. strategies, decision-making authorities, and courses of action to be taken. The liquidity positions in the major currencies are being closely monitored. - Embarked on Basel III, fulfilled the quarterly reporting requirement to BNM with regard to leverage and liquidity positions.

The main results of this study are: 919

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

- As a matter of requirement, all Operational Risk Coordinators must satisfy an Internal Operational Risk (including antimoney laundering/counter financing of terrorism and business continuity management) Certification Program.

Malaysian bankers are aware of the importance and the role of effective risk management in improving bank performance Malaysian banks have implemented some effective risk strategies and effective risk management frameworks (framework, process and policies); Malaysian banks have a formal Risk management system in place. Malaysian banks implement a committee responsible for identifying, monitoring, and controlling different risks. Collateral and guarantees continue to be used risk mitigation methods to provide support to credit facilities in Malaysian banks. Value-at-Risk (VaR) is extensively used by Malaysian banks. Malaysian banks implement methodologies of operational risk management. Analysing liquidity risk management shows that Malaysian banks are strengthening their liquidity risk management. Malaysian banks pick up the role of transparency and market discipline to encourage the disclosure of risk information with reference to Basel III. 5. Conclusion

practices. It is a key factor in assessing the futurepotential of a bank and the performance of management.Many banking institutions are taking a more active role in forming the risk management policy and framework andapproving their risk appetite.The study found that collateral continues to be used risk mitigation methods, and Value-at-Risk (VaR) is extensively used by Malaysian banks. Malaysian banks have also voluntary in advance disclosure of risk information with reference to Basel III. Finally, risk management should be an unceasing andevolving process in banking institutions, which should address carefully all the risks surrounding thebanking institution activities past, present and future. REFERENCES Abidin; Nor Azizah Zainal; and Ahmad, Halimah Nasibah (2007) Asian Academy of Management Journal, 12(1), pp. 23 34. Risk Management, Corporate Governance, and Bank Welcome Speech at the Risk Management Seminar on Basel II: Enhancing the Soundness of the Banking Sector 2008. http://www.bnm.gov.my/index.php?ch=9&pg=15&ac=149 (Accessed April 16, 2014). Bank Negara Malaysia (201 http://www.bnm.gov.my/index.php?ch=13&cat=banking(Accessed April 16, 2014). disclosure and supervisory information that promote safety and soundness inbanking Bank for International Settlements, Basel. Basel Committee in Banking Sup Bank for International Settlements, Basel. Bank for International Settlements, Basel. Bank for International Settlements, Basel.

920

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)

Basel Committee on Banking Supervisi for International Settlements, Basel. Basel III: A global regulatory framework for more resilient banks and bank Bank for International Settlements, Basel. -at-Risk Models at Commercial Journal of Finance, 57, pp. 1093-1112. Accenture. Cornett, M.M., McNutt, J.J., Strahan, P.E. and Tehranian, H. (2011 Liquidity risk management and credit supply in the nancial Journal of Financial Economics, 101(2), pp. 297 312 Conference on Risk management and regulation in Banking, Jerusalem. navigating in a Deloitte Global Services Limited. Bloomberg Press, Princeton, New Jersey, pp 21. Politics in business: UMNO's corporate investments Honohan, P. (2008) National Institute Economic Review, 206; pp. 15-24. BIS Papers, 54, pp. 267-278. 56. Jorion, P., and Khoury, S. J. (1996 Financial Risk Mangement Domestic and International Blackwell Publishers, Cambridge, Massachusett, pp.2 Jorion, P. (2009) European Financial Management, 15(5), pp. 923 933. KPMG (2004). Ready for Basel II how prepare KPMG International. Business Studies, University of Vienna. Malaysian Institute of Corporate Governance (MICG). (2012) About Us. http://micg.org.my/ Minority Shareholder Watchdog Group (MSWG). (2011) About Us. http://www.mswg.org.my/ (Accessed April 13, 2014).

Corporate Governance in Asia: Lessons from the Financial Crisis, UNDP, Malaysia.

921

Print to PDF without this message by purchasing novaPDF (http://www.novapdf.com/)