a. Risk Oversight Committee
The Risk Oversight Committee reports to the Board of Directors regarding Bank’s risk profile, as well as its risk management framework, including the significant policies and practices employed to manage risks in CSBI’s businesses, as well as the overall adequacy of the risk management function.
b. Risk Management Department
The Risk Management Department (RMD) is reporting to the Risk Oversight Committee and primarily responsible for identifying, measuring, assisting in controlling [mitigating] and monitoring risk inherent and residual in the bank’s activities.
II. RISK DESCRIPTIONS
a. Strategic Risk – is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes.
b. Credit Risk – arises from counterparty’s failure to meet the terms of any contract with the Financial Institution (FI) or otherwise perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance. It arises any time FI funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet. Credit risk is not limited to the loan portfolio.
c. Liquidity Risk – is generally defined as the current and prospective risk to earnings or capital arising from an FI’s inability to meet its obligations when they come due without incurring unacceptable losses or costs. 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 liquidate assets quickly and with minimal loss in value.
d. Market Risk – is the risk to earnings or capital arising from changes in the value of traded portfolios of financial instruments. This risk arises from market-making, dealing, and position-taking in interest rate, foreign exchange, equity and commodities markets. Interest rate risk, on the other hand, is the current and prospective risk to earnings or capital 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 FI activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-related options embedded in FI products (options risk).
e. Operational Risk – is the current and prospective risk to earnings or capital arising from fraud, error, and the inability to deliver products or services, maintain a competitive position, and manage information.
III. RISK MANAGEMENT PROCESS
Risk Management is a discipline at the core of every institution and encompasses all the activities that affect its risk profile.
In order to manage risks, an institution must identify existing risks or risks that may arise from both existing and new business initiatives
Once risks have been identified, they should be measured in order to determine their impact on the institution’s profitability and capital. This can be done using various techniques ranging from simple to sophisticated models.
After measuring risk, an institution should establish and communicate risk limits through policies, standards, and procedures that define responsibility and authority.
Institutions should put in place an effective management information system Management Information System (MIS) to monitor risk levels and facilitate timely review of risk positions and exceptions.